Apple Prepared To Pass Microsoft As Second Most Valuable US Company

Over the last year as Apple’s (NASDAQ: AAPL) sales have grown and expectations for its new products have blossomed, the company’s market value has increased by more than double as its stock price  moved from $118 to almost $260. Along the way, its market cap has eclipsed  Walmart (NYSE: WMT), International Business Machines (NYSE: IBM), GE (NYSE: GE), Procter & Gamble (NYSE: PG) and Bank of America. (NYSE: BAC).

Now, Apple is very close to passing Microsoft to become the second most valuable company in America. Its current market cap is $235 billion to Microsoft’s $275 billion.  Some analysts have stock price targets of $300 for Apple. If the shares reach that level and Microsoft shares remain where they are at $31.50, a 52-week high, Apple will soon move ahead of Microsoft.

The notion that Apple should be worth more as a company than Microsoft is implausible at first analysis because Microsoft’s sales are close to $20 billion in strong quarters and its operating income near $8 billion. By contrast, in the quarter that Apple reported yesterday its revenue was just over $13.4 billion, a 48% increase, with operating income of about $4 billion, a 73% gain. Those sales and income figures are still well below Microsoft’s.

The difference between the two firms is that investors believe that while the sun never used to set on the Microsoft empire that it is no longer the case. Apple is a company in the middle of a remarkable growth spurt. And, Microsoft’s revenue in its last quarter rose only 14% to $16.6 billion. Operating income rose 41% to $8.5 billion. Analysts believe that these improvements will be short-lived because they were cause in large part to initial sales of Windows 7.

Apple also has the advantage of a product line that is doing well with sales strength for each of its major offerings. Mac sales were up 33% in the last quarter. iPhone sales more than doubled. And, sales of the iPod were flat, impressive given that the product has been available since 2001.

The perception of Microsoft is much different. Its Windows, Office, Business, and Servers & Tools margins are still high, often above 70%. But, the amount of competition that Microsoft faces has grown as more and more operating software is used on smartphones and desktop users have inexpensive alternatives like Google (NASDAQ: GOOG) Apps. Microsoft has failed to get any meaningful part of the smartphone OS industry. By contrast, the Apple OSX is on every iPhone. Apple has sold 50 million iPhones and the number is growing by eight million per quarter. Sales of the device in some large markets like India and China are just beginning.

Microsoft’s enterprise software businesses face increased competition from Oracle (NASDAQ: ORCL), SAP (NYSE: SAP), and salesforce.com (NYSE: CRM). Each is a large company in its own right. Oracle had revenue of $6.4 billion in its last quarter.

Microsoft’s diversification has also worked against it in the market. Its search and portal business loses hundreds of millions of dollars each year as Redmond tries to take search share from Google. Microsoft’s device business, which includes low margin products like the Zune and Xbox 360, does almost nothing to contribute to Microsoft’s earnings.

Microsoft, which has almost no competition two decades ago is new viewed as being beset by competition, and Apple is viewed as having no competition at all.

Douglas A. McIntyre