IT Vendor Market Cap Follies

Published: November 5, 2007

by Timothy Prickett Morgan

The world is a funny place. Funny in terms of "ha ha" as well as in funny as "downright strange." Someone sent me an email last week, laughing because the market capitalization of Apple Computer had surpassed that of IBM.

Market cap--the value of all of the shares outstanding in public companies as reckoned by the price of shares on Wall Street--is as good a measure as any about what the world thinks of that company. But considering the amount of flim-flam and nonsense in people's reasons for valuing companies--well, at least some of the time--maybe market cap goes too far sometimes.

To get a sense of reality, I like to gauge the market cap of any IT company against its annual earnings. If the company is healthy, growing, and profitable, the ratio should be well above one; if it falls below one, you are either a giant retailer hitting up against some limits (like Wal-Mart is), or you are a struggling manufacturer in the North American or European markets (as General Motors is). Check out this table below for your amusement.

It just cracks me up that General Motors, with over $207.3 billion in sales in its last annual report, has a market cap of a mere $21.1 billion. That's just crazy. And I also think it is perfectly insane that Google, with $15 billion in sales in its past 12 months, now has a market cap of $219.5 billion--a ratio of nearly 15 to 1 against revenues. All the profits generated by the S&P 500 for the past several decades does not justify such a multiple, but if you bought Google at $200 bucks a share and you are sitting at it at north of $700 a share, you are feeling pretty smug about right now. Microsoft's multiple is high, but that is because it has 1.5 monopolies--one on the desktop and half a one in the data center--which means it can profit as if it were a $200 billion company even though its latest annual sales are only just above $51 billion in its latest fiscal year. It also seems ridiculous as well as ironic that Google is now worth more than Berkshire Hathaway, the financial empire built by Warren Buffett, a friend of Bill (Gates that is, not Clinton) who is often vying with him as richest man in the world and who has donated his riches to the Bill and Melinda Gates Foundation to do some good in the world.

That Apple has a multiple in the same range as Microsoft just goes to show that Steve Jobs is just as smart as Bill Gates, but he didn't start with a monopoly. But, if the iPod is any indicator, he may end up with one. (My wife just got me an iPod Nano, which I have resisted plugging in until this newsletter is completely written.) Intel is under competitive pressure from Advanced Micro Devices, and even though its fortunes have recovered in recent quarters, its market cap to revenue ratio shows the pressure, since Intel used to be valued right up there with Microsoft only a few years ago. It also shows that hardware doesn't drive profits the same way it used to, and software still does. Again, Gates got the better part of the Wintel duopoly. Which is no surprise, now is it?

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