Where does Microsoft stand today?
For decades, Microsoft Corporation (NASDAQ:MSFT) has been the leading software company, dominating the market for PCs with its Windows operating system. Microsoft Corporation (NASDAQ:MSFT) is known for creating major revolutionary moments, which is why the company is still one of the leading brands in the world.
Despite all of its success, Microsoft Corporation (NASDAQ:MSFT) has lost much of its spark lately, especially after Apple Inc. (NASDAQ:AAPL)’s sudden impact on smartphones, tablets and PCs.
After having a successful time in the software market, Microsoft Corporation (NASDAQ:MSFT) expanded its operations and also entered the gaming segment with its Xbox console. Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) have been going head to head in getting the major market share in the gaming segment; however, Microsoft Corporation (NASDAQ:MSFT)’s latest Xbox One has left many loyal customers, along with its investors, disappointed.
What went wrong with Microsoft?
For several years, things have not been looking that good for Microsoft. Microsoft used to rule the world, but today, it is just another company trying to survive with the fierce competition.
For years, Microsoft’s latest offerings have been disappointments including its Bing seach engine, which just couldn’t break Google’s strong search engine share. Then, Microsoft’s Zune player failed miserably against Apple Inc. (NASDAQ:AAPL)’s iPod.
On top of that, Microsoft’s strongest business division is also not having its best time, as the PC market is on a consistent decline. I still think a major part of this should be contributed to Apple’s iPhone in 2007. Since then, the entire industry has changed, and Microsoft was just not good enough to enter into new segments. A smartphone partnership with Nokia also hasn’t paid off, and Microsoft’s OS is still pretty far behind Android and Apple’s OS market share in smartphones.
Microsoft’s lack of innovation could also be considered as a major factor, as the company is just not what it used to be under Bill Gates. The smartness, getting the first mover advantage and bringing in revolutionary products has all gone away from Microsoft.
Valuation
Microsoft, with a market cap of over $285 billion, is currently trading at around $34-$35. Overall, Microsoft’s stock has performed relatively well in the market, going up from the $27 mark in April. Microsoft’s latest earnings report showed a profit of over $6 billion, which is not too bad with respect to the fact fact that Microsoft missed the smartphones and tablets market and witnessed a strong decline in the PC market.
Apple, perhaps Microsoft’s biggest rival, is trading around $417, with a market cap of around $391 billion. Microsoft isn’t the only company losing its spark in recent years as Apple’s stock has been on a constant decline since reaching the $700 mark last year. The company has witnessed a steady decline in market share for its iPhone smartphone, and I think its fair to say that Apple, under Steve Jobs, was a much better company.
Where does Google stand today?
Several people have said that Google’s co-founders,Larry Page and Sergey Brin, have sought to build their company so that it wouldn’t make the mistakes that Microsoft did in the 1990s.
Here are 7 similarities:
1. They have the same number of employees as Microsoft did in 1999. Google just announced its headcount is now over 32,000. Microsoft’s headcount in mid-1999 was 31,000. Of course, Microsoft’s headcount has only exploded since then and is now at 90,000. Despite Google’s much ballyhooed “20% blue sky time” for dreaming up new R&D projects, Google has always had difficulty bringing new entrepreneurial products to market even when it was much smaller. It will be increasingly difficult and more bureaucratic now.
2. Anti-trust fears. Google is under governmental pressures around its dominant share in search today just as Microsoft was distracted by fears of its Windows platform dominance back then.
3. Small ankle-biter competitors in plain sight. Microsoft’s future competitors were in plain view in 1999, but a fraction of their size today. Google itself was founded in 1998. Apple (AAPL) was still trying to sort itself out with Steve Jobs’ return to the company. How big will Facebook (FB) grow to be in the next 10 years versus Google?
4. Google has about the same annual net income today that Microsoft did in 1999. Google shows no sign of slowing down its revenue and profit growth – just as Microsoft didn’t. Google has done $38 billion in revenue in the last 12 months and $10 billion in net income. Microsoft did $20 billion in revenues in 1999 and $7.8 billion in net income. In the last year, Microsoft is up to $72 billion in annual revenue and $23.5 billion.
5. However, unfortunately for Google, future revenue growth doesn’t equal future stock growth. What can Google shareholders expect in the next 13 years? Of course, if Microsoft’s stock chart is a perfect guide (and it isn’t), Google’s stock is heading for a 27% decline in the years ahead. While that’s silly to expect that to a precise degree as circumstances are still vastly different between the company, that directional bet is probably correct. Heck, Google’s stock has already been flat for the last 5 years, so investors are clearly worried about future growth prospects.
6. Microsoft hadn’t yet paid a dividend then, just like Google but both had too much cash to be able to reinvest. Microsoft didn’t start paying a dividend until 2003. We might have to wait 4 more years for Google to do so as well. But Google today has nearly triple the cash that Microsoft did in 1999: $49 billion versus $17 billion. A dividend is likely coming sooner than anyone expects for Google.
7. The Google co-founders are 38 today. Bill Gates and Steve Ballmer were 43 in 1999. I’m sure that the Google co-founders like to think of themselves as young and hip. However, compared to Mark Zuckerberg and Kevin Systrom of Instragram, Page and Brin are dinosaurs. Anyone can see the flecks of gray in Larry’s hair in the last year. That’s not to say old guys can’t innovate in tech. Look at Steve Jobs. However, Page and Brin are older guys with a lot of bureaucracy and path dependence surrounding them – just as “evil” Microsoft was.
Where is Apple going from here?
Hear the one about two guys who started a computer company in their garage? Of course you have: Today, one such company is estimated to be the most valuable one in the world (or pretty close to it, depending on the fluctuations of the stock market). And there’s a good reason for that, as I discovered recently on an Acelafrom New York to Boston: If you were an alien who just landed on our planet and somehow hopped on that train, you’d assume that all humans constantly consult some sort of oracle emblazoned with a fruit logo.
The history of Apple has been well chronicled, and the story of the two Steves has taken on mythic proportions. But the story has only just begun as far as I’m concerned. Apple’s value is now north of half-a-trillion dollars. (To paraphrase the late Senator Everett Dirksen, a trillion here and a trillion there and pretty soon you’re talking serious money.) So, as Jed Bartlet, might say, the question for Apple is: What’s next?
If you’re screaming “television sets!”, calm down. Yes, even you, Wall Street Analyst Who Shall Not Be Named. The entire television-set business is worth about $30 billion. That’s it. Even assuming Apple takes all of that, it’s hardly the type of revenue that Apple needs to fuel the future. That’s the kind of money the company keeps under the mattress for a rainy day purchase or two.
I don’t like to predict what Apple might or might not do on any given Tuesday. In fact, those that do make such predictions are almost always more wrong than right. I will venture to say that Apple must seek new opportunities in other markets. What I do know is that, in the past, Apple invented new places for itself to go that we didn’t even know existed, which is what makes predictions so difficult and why prognosticators often turn out to be wrong.
It is said that after conquering all of the then-known world, Alexander the Great wept, for there were no more worlds to conquer. In a world where the Apple ecosystem has permeated the hearts, minds and wallets of people everywhere, what happens when everyone has an iPhone or iPad? How many product revisions will consumers continue to purchase? How many new product categories can be created that can spur growth as iPad did?
It wasn’t that long ago that a popular mantra in business was that no one got fired for buying IBM. A decade ago, Microsoft was viewed as nearly invincible in the digital age. Today’s technology industry is moving at a pace never seen before. Companies with literally no revenue and fewer than a dozen employees are bought for a billion dollars or more. It is in this world that Apple must look to a future of continued relevance and strive for the—ahem—“NeXT” big thing.