Apple and the Myth of Market Cap

I’m sure the champagne corks are popping all over Cupertino today as the word got out that Apple's market capitalization had exceeded that of Microsoft. Microsoft Chairman Steve Ballmer, meanwhile, was quoted in India as saying that this really doesn’t matter very much since Microsoft is more profitable. People who play the stock market and were betting on Apple’s stock are no doubt delighted, assuming they’re planning to sell fairly soon.

But you have to ask yourself if Apple is really worth more than Microsoft or any of a number of other companies in the top-10 range in market capitalization. Apple is selling at something like 26 times earnings, which is pretty expensive. Will it stay there, or is this an example of that “irrational exuberance” we heard about when the tech bubble burst? After all, Apple is nothing if not good at self promotion, and a lot of people, especially smaller investors, can buy into that without looking at the economics behind the stock value.

Compare that against say, Exxon Mobile, which is still a lot larger than Apple is ever likely to get, and you’ll see what I mean. This is an oil company with facilities located globally that provides a product in very wide demand. It’s selling at about 15 times earnings which is a much more typical range for large companies. If you look at the other measures of a company’s valuation, including its book value, you’ll see that Exxon Mobile is worth vastly more than Apple.

So why the big deal over Apple’s sudden rise in market cap? Partly, I’m sure it’s surprise. After all, who’da thunk that Apple would ever be bigger than Microsoft? After all, Microsoft is running on something like 90 percent of the computer platforms on the planet. Apple is running on something like 6 percent. Of course, Apple is getting its numbers from the iPhone and iPad rather than its small share of the computer market.

I’m sure it’s also part of Apple’s skill at self promotion. Its stock is worth a lot because people believe it should be worth a lot. After all, Apple has the iPad. What does Microsoft have? In reality, Microsoft has a lot, but that’s kind of beside the point. Today’s story is Apple’s huge jump in market cap.

But with valuations like this that resemble the pre-bubble tech market, you have to wonder how long it can be sustained. Will the next week bring the realization that Apple’s stock is really pretty expensive? Will there be a discovery that a stock selling at 26 times earnings is probably trading at a level that’s not sustainable?

I guess we’ll see. But in the trading days to come, I suspect we’ll see that the run up in valuation will lead to a sell off by those who were in the stock for just such an eventuality. At some point, the market cap will return to more reasonable levels, and once again Microsoft will be larger.

And then, of course, comes the next question, which is whether it matters at all. Nothing in Apple’s market cap will change the products the company is selling, or how it sells them. Nothing in this will change the progression of Windows 7 at Microsoft or the iPhone-derived products at Apple. Except for those people who are taking their profits with this rise, nothing will really have changed.

In other words, the hype that’s surrounding this is just that. It doesn’t actually mean anything for the long term of either company. So while a few people will get rich, and a few more will get poorer, the end result is going to be that market cap really doesn’t mean much to anyone else. So chalk it up to one of those fun facts that a volatile stock market creates, and drink a toast to Apple for pulling it off. Just be careful where you put your money.

(Disclosure note: I don’t own stock in either Apple or Microsoft. We tech journalists aren’t allowed to own stock in the companies we write about. So while everyone tries to guess the market moves of Apple and Microsoft, I’ll just sit and watch you all have fun.)