Common Sense
By JAMES B. STEWART
When Microsoft stock was at a record high in 1999, and its market capitalization was nearly $620 billion, the notion that Apple Computer would ever be bigger — let alone twice as big — was laughable. Apple was teetering on bankruptcy. And Microsoft’s operating system was so dominant in personal computers, then the center of the technology universe, that the government deemed the company an unlawful monopoly.
This week, both Microsoft and Apple unveiled their latest earnings, and the once unthinkable became reality: Apple’s market capitalization hit $683 billion, more than double Microsoft’s current value of $338 billion.
At Apple’s earnings conference call on Tuesday, its chief executive, Timothy D. Cook, called the quarter “historic” and the earnings “amazing.” Noting that Apple sold more than 34,000 iPhone 6s every hour, 24 hours a day, during the quarter, he said the sheer volume of sales was “hard to comprehend.”
Apple earned $18 billion in the quarter — more than any company ever in a single quarter — on revenue of $75 billion. Its free cash flow of $30 billion in one quarter was more than double what IBM, another once-dominant tech company, generates in a full year, noted a senior Bernstein analyst, Toni Sacconaghi. The stock jumped more than 5 percent, even as the broader market was down.
A far more subdued Satya Nadella, Microsoft’s chief executive, who is trying to transform the company and reduce its dependence on the Windows operating system, referred to “challenges.” Microsoft’s revenue was barely one-third of Apple’s, and operating income of $7.8 billion was less than a quarter of Apple’s. Microsoft shares dropped over 9 percent as investors worried about its aging personal computer software market.
Robert X. Cringely, the pen name of the technology journalist Mark Stephens, told me this week that when he interviewed Microsoft’s co-founder, Bill Gates, in 1998 for Vanity Fair, Mr. Gates “couldn’t imagine a situation in which Apple would ever be bigger and more profitable than Microsoft.”
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Mr. Jobs “told me that Tim Cook would be an inspiring leader,” Mr. Isaacson said. “He knew Tim wouldn’t wake up every morning trying to figure out what Steve Jobs would do. Steve would never have made a bigger iPhone. He didn’t believe in it. But Tim did it, and it was the right thing to do.”
Some investors worry that Apple could become the prisoner of its own success. As Mr. Sacconaghi noted, 69 percent of the company’s revenue and 100 percent of its revenue growth for the quarter came from the iPhone, which makes Apple highly dependent on one product line. “There’s always the risk of another paradigm shift,” he said. “Who knows what that might be, but Apple is living and dying by the iPhone. It’s a great franchise until it isn’t.”
Apple is also running into “the challenge of large numbers,” Mr. Cihra said. With a market capitalization approaching $700 billion, the number “scares people,” he said. “How can it get much bigger? How is that possible?” Apple is already the world’s largest company, by a significant margin.
But he noted that by many measures, Apple shares appeared to be a bargain. “The valuation is still inexpensive,” he said. “It’s less than 13 times next year’s earnings and less than 10 times cash flow,” both below the market average. “Those are very low multiples. They have $140 billion in cash on the balance sheet and they’re generating $60 billion in cash a year. All the numbers are just enormous, which is hard for people get their heads around.”
Mr. Cihra noted that Microsoft already dominates its core businesses, leaving little room for growth. But, he said, “Apple still doesn’t have massive market share in any of its core markets. Even in smartphones, its share is only in the midteens. Apple’s strategy has been to carve out a small share of a massive market. It’s pretty much a unique model that leaves plenty of room for growth.”
Can Apple continue to live by Mr. Jobs’s disruptive creed now that the company is as successful as Microsoft once was? Mr. Cihra noted that it was one thing for Apple to cannibalize its iPod or Mac businesses, but quite another to risk its iPhone juggernaut.
“It’s getting tougher for Apple,” Mr. Cihra said. “The question investors have is, what’s the next iPhone? There’s no obvious answer. It’s almost impossible to think of anything that will create a $140 billion business out of nothing.”
A version of this article appears in print on January 30, 2015, on page B1 of the New York edition with the headline: Overtaking a Behemoth . Order Reprints| Today’s Paper|Subscribe
