Could Apple overtake Microsoft?

By MATHEW INGRAM
Thursday, February 08, 2007

Not that long ago, anyone suggesting that Apple might some day be as large as _ or even larger than _ Microsoft would have been laughed out of the room. After all, Apple was a mere pipsqueak in the personal computer market, while Microsoft controlled more than 90 percent of the desktop software business worldwide.

In 2004, Apple had somewhere around 2 percent of the computer market, and annual revenue of slightly more than $8 billion. Its stock market value was roughly equal to its sales, at about $9 billion or so. Microsoft, by comparison, had revenue of $37 billion, almost five times larger than Apple's, and a market value 30 times higher, at about $275 billion.

The past few years have shown, however, that the best company _ and by far the best investment _ has been Apple. Its shares have climbed more than 700 percent to the $83 level, and its sales have soared 150 percent to about $21-billion. Microsoft's sales are now only twice as large (although its stock market value is still substantially larger).

A financial blog called 10Layers.com caused a stir recently by suggesting that if current trends continue, Apple could actually surpass Microsoft in terms of sales within the next five years, hitting the $65-billion revenue mark (according to one forecast) in 2010 or 2011.

This hypothesis can be criticized on any number of levels, of course, including the fact that the "law of large numbers" makes it a lot easier to grow to $20 billion in sales from $8 billion than to $65 billion from $30 billion. But the theory still captures the inherent contrast between Apple and Microsoft, which is that the former has been growing much more rapidly, and seems likely to continue doing so in the future.

Microsoft's business _ although large _ has been relatively stagnant over the past couple of years as the software giant has poured billions of dollars into the repeatedly delayed Vista operating system. One of the only bright spots has been the publicity boost provided by sales of its Xbox and Xbox 360 game consoles (although the game unit has yet to produce a profit).

Apple, meanwhile, has gone from strength to strength over the past few years, after having been virtually poised at death's door. First came the iPod, then iTunes (which has gone from offering just music to movies and TV shows), combined with steadily rising sales of Macs. And Apple has captured the imagination with product launches such as the iPhone and Apple TV box, while Microsoft's Vista launch has comparatively fallen flat.

So is it possible that Apple's sales will eclipse Microsoft's by 2010? It's not as outlandish as it sounds. In order to do so, Apple would have to grow by 25 to 30 percent a year, which is not unheard of (of course, it's also possible that Microsoft's revenue could decline over that period). However, the list of $20 billion companies that can grow at 30 percent or more _ and do so every year for five years _ is so short as to be almost non-existent.

Google is probably in that category, having doubled its sales every year for three years in a row, but it started from virtually nothing, and its growth has begun to slow. Amazon and eBay both turned in growth rates higher than 50 percent for several years in a row at one point, but they too were starting from a much smaller base than Apple's $20-billion, and they have also begun to slow.

One final point worth considering when looking at Apple versus Microsoft is that revenue is not the only important benchmark, and probably not even the most important one when it comes to a company's value, at least in investing terms.

Microsoft's sales may only be twice Apple's now, but its market value is about four times as high _ close to $300 billion versus $72 billion.

The main reason for that is that Microsoft's profit is much higher. In 2006, it was more than six times that of Apple's.

A great example of the disparity between sales and market value is to compare Wal-Mart and Microsoft: At about $380 billion, the retailer's sales are 10 times higher than the software company's, and yet Wal-Mart's market value is substantially lower than Microsoft's, at only $200 billion.

Market value aside, however, there is no doubt that Apple currently seems to have all the momentum _ in a corporate sense, at least _ while Microsoft has increasingly little. Whether the smaller company can maintain that momentum, and continue to gain ground on its much larger competitor, is the billion-dollar question.