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Value Goes to Growth

31 March, 2010

Apple now has a market cap of $210B.  Microsoft has a market cap of about $260B.  To traditionalists, this must seem contradictory.  Apple has fought its way into new markets, and has domination in none (except maybe the narrowly defined individual music download business).  Microsoft has near monopolistic market presence in personal computer operating systems and office software. According to modern business theory from business schools, and the output of books such as Business Strategy by Michael Porter, the monopolist company has entry barriers protecting its return – and thus the ability to almost print unlimited profit.  Yet this has not happened.

At SeekingAlpha.com “Apple versus Microsoft: The Value Gap is Closing” the case is made that the value difference is all due to growth.  Apple’s business for music devices and content is growing – quickly.  Its business for mobile devices and mobile device applications is also growing very fast.  Those offer substantial positive cash flow today, as well as dramatic cash flow growth in the future.  So much so that many analysts wonder what Apple will do with all that money.   And that doesn’t even count the iPad sales which have exceeded expectations – before even available to ship.  And businesses are starting to build applications for the iPad, as explained in the BusinessWeek article “Businesses want Apple’s iPad, too.”

On the other hand, the demand for PCs is sluggish – at best.  People increasingly leave their laptop at home for extended time while the use their mobile device instead.  But Microsoft is stuck in a loop of upgrade development and launch.  But because of the market shift, these investments are yielding less and less return.  Complexity cost is going up, and profits are going down, and growth is dropping precipitously.  Products in music, mobile phones and advertising have all lost significant share to Apple, Google and others as attention has remained on the “core” business.  So even though current cash flow is strong, value has gone absolutely nowhere for several years, and there’s precious reason to think it will go up.

When you lose growth, even if you prop up profits with draconian cost cutting and inventory sales, you lose value.  Just look at Sears/KMart.  Investors were really excited when Mr. Lampert used his takeover of KMart to acquire Sears.  Predictions flew that he would get Sears growing again, while simultaneously monetizing the huge real estate portfolio.  But as detailed in Chicago Tribune “Sears and KMart Still Standing, but Market Share Dwindles,” value has declined.  Mr. Lampert has proven very good at whacking cost.  But when it comes to growing revenue – something that will drive ongoing growth in cash flow for a decade or more, he’s shown nothing.  You can’t cost cut your way to long term success.


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Value Goes to Growth

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