IBM’s Market Value Passes Microsoft After 15 Years
October 3, 2011 Timothy Prickett Morgan
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Well, it only took a decade and a half, but as far as Wall Street is concerned, IBM is now as valuable as Microsoft. On late Friday, as I was putting together this newsletter, IBM’s stock was hovering around $178 a share, giving Big Blue a market capitalization of $212 billion. That’s a little bit off from the $185.63 high that IBM set back on July 22, but with Microsoft’s shares falling (for a variety of reasons), IBM has pulled slightly ahead of Big Bill at the Thursday close. Microsoft had recovered a little to a $215 billion valuation by Friday afternoon. Neither can come close to Apple, which has a stock price of $385.32 as I write this and which gives it a market cap of $370 billion. As the dot-com, ERP, and distributed computing booms were roaring at the turn of the last century and the PC was very much the device we all used to compute, Microsoft’s market cap kissed a whopping $600 billion, so its fall from grace on Wall Street has been quite dramatic. Then again, how many hundreds of billions of dollars of profits has Microsoft pocketed in that time? This, as far as I am concerned, is a much better metric than market capitalization. One is gambling on what something is worth (that’s the casino down on Wall Street), while the other is an indisputable pile of cash leftover after paying the employees and the bills (I believe in net income, not earnings per share). I did the math. Since 1995, when Microsoft was less than one-tenth of its current size in terms of annual revenues, the company has brought a combined $148.2 billion to the bottom line against $518.2 billion in sales. That works out to profits of 28.6 percent of revenue on average across those years. This is the kind of financial performance that IBM could deliver in the 1960s and 1970s, against a much smaller computer business, of course. So how did IBM do? Take a look at this chart:
Over that same time frame, IBM has brought in $1.34 trillion–that’s with a T–in revenues, but only brought $129.4 billion to the bottom line. The chart above starts in 1989 for IBM, which is just before the mainframe business went up on the rocks, Unix servers took off, the PC business was slammed by a recession, and the AS/400 business was one of the few pieces of good news. In 1991 through 1993, IBM lost a total of $15.9 billion, which was the largest losses ever posted by an IT vendor and, as I have said before, I think if you looked at Big Blue’s cash flow in 1992, it was technically bankrupt. But Lou Gerstner came in and got IBM focused on services, and that got Big Blue back onto its track. It is, however, a track that throws off inherently less cash–and less cash per dollar of revenue, too. Microsoft’s monopolies with Windows and Office on the desktop and Windows and its related systems software on servers are, in the final analysis, stronger than the monopolies Big Blue still has with mainframes and IBM i boxes. WebSphere and DB2 are the closest things IBM has to monopolies, which is why you can expect Oracle to target them like a laser any minute now. Once Larry Ellison is done messing with Hewlett-Packard –perhaps after acquiring it–you can bet the Oracle co-founder and CEO will turn his attention to Big Blue. Because he sure as hell can’t take on Google or Apple.
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