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Mar 10


As Apple stocks keep hitting all-time highs, much has been made recently of the rapidly decreasing gap between Microsoft and Apple’s respective market capitalizations.

At market close today, Microsoft had a market cap of about $259.5bn, compared to Apple’s $210.7bn. To catch up, Apple stocks would need to increase 23%, which would price them at roughly $286 a pop (assuming Microsoft’s price remains stagnant, which is not an unfair assumption, given the MSFT has been trading at about the level it is today since the start of 2001). Microsoft hit a record high market cap of nearly $600bn during the delusional dot com boom days – if it ever gets up there again, it will probably only be because of inflation.

Yet, when we look at the financials for calendar Q4, 2009, we see:

Microsoft Apple
Revenue (billions) $19.0 $15.7
Gross Profit $15.4 $6.4
EBIT $8.5 $4.7
Net Income $6.6 $3.4

Net Income for the whole year was $14.57bn vs $8.24bn. I’m by no means well versed in reading financial statements, but it seems clear that although Microsoft’s revenue is 21% higher than Apple (about the same as the difference in market cap), Microsoft has way higher margins and is thus almost twice as profitable. And at the end of the day, it’s the profit that counts, right? (I don’t care if you have a turnover of $1bn – if you operate on razor-thin margins of 1%, then a company with margins of 30% that only generates $50m revenue is making substantially more dough than you.)

Microsoft also has a lot of cash & short term receivables in the bank: $35.1bn, compared with Apple’s $23.4bn at year end (although some later articles seem to report a $40bn cash horde), so both companies are healthy in that respect and relatively unleveraged.

The argument is that Apple, with a promising product pipeline, has a bright future ahead, with higher growth rates than Microsoft. The iPad of course opens up a new revenue channel for Apple, and product refreshes for the iPhone, Mac Pro, and Macbook Pro due out this year will keep kicking along revenue growth. And what’s exciting that’s on the horizon for Microsoft? There’s not much that comes to my mind.

But just how much will the iPad do for Apple? An analyst from Morgan Stanley optimistically forecasts iPad sales in 2010 of around 6 million (with shipments to intermediary sellers clocking in at up to 10 million). Let’s take an average selling price of $650 – roughly midway between the 16gb non-3G model and the 64gb 3G model, and you get revenue of about $4bn. Based on estimates of production costs, the materials and manufacturing cost roughly 40% of the retail price (gross margin of 60%). Other reports say the gross margin is only about 30%. Let’s be generous and estimate the net margin at 30%, and we get net profit on iPad sales of about $1.2bn. Still not that close to Microsoft’s net income, but getting there.

There’s a lot of excitement surrounding Apple at the moment, and I would be wary about the possibility of a mini-bubble forming around Apple stock. If Apple’s market cap reached Microsoft’s at some point this year… it would be difficult to say that there is not some mispricing happening somewhere.

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