Apple, Microsoft and the Market Cap Myth

It seems that the press has found this week's Next Big Topic: that Apple (AAPL) surpassed Microsoft in market cap. In the U.S., it's now second only to Exxon (XOM). Microsoft CEO Steve Ballmer essentially dismissed market cap as a measure of importance.

It might be defensive sour grapes, but I find myself in agreement. This probably sounds anti-Apple to that company's fan base, but it's not. I just don't see why is everyone so obsessed with market capitalization, particularly when there's often no objective rhyme or reason to who's on top.

Market cap is certainly important in some occasions. If company A wants to buy company B, knowing the market cap gives an idea of the minimum it would cost to get a controlling interest. Many lenders, insurers, and other financial service companies look carefully at the metric on the off chance that a large company might default. Nice to know that a secondary offering could raise cash. Clearly investors -- and that includes executives with drawers of stock options â€"- will care.

But as information that's generally important to managers? No, I don't buy it for a second. Like most investor activity these days, market cap rises because of expectations for a company's future, not necessarily what its executives have tangibly obtained.

Market cap doesn't dictate that any given company is the most important in a given industry. And it certainly doesn't always provide a reliable indicator of how sound a company is. Go back to the tech bubble in the late 1990s to see many companies that had little intrinsic worth and yet still had sizable market caps ... at least for a while.

Of course, I don't put Apple in that category. Although it has some glaring weaknesses, it's generally well run and clearly successful. But is it necessarily the "biggest" tech company? I assembled a table of leading tech companies, comparing market cap to net revenue, operating income, and net income from the last reported quarter. The last three columns represent market cap divided by net revenue, operating income, and net income, respectively:

By market cap, Apple is in the lead. But is it realistic to call it the "biggest" tech company when its revenue is still a fraction of IBM's (IBM)? Clearly Apple is far better at making profit from revenue, but which is more tied more into the fabric of the global economy, Apple or IBM? The latter, clearly.

Apple's market cap has passed Microsoft's, and yet the latter still has higher revenue, operating income, and net income. Apple's future may look brighter from the outside, but larger? No. In as many areas of technology as pervasively as Microsoft (MSFT)? No. Intel had lower net revenue, but kept a greater percentage of what it brought in as operating income and net income. Both HP and AT&T (T) had revenue even higher than IBM's. Additionally, in terms of how the last three ratios, which show how much market cap a given company has for every dollar in revenue or income, Apple is near the top, and so far more highly valued for given performance than most of the other giants.

Journalists obsessively follow market cap because it's an easy way to turn every industry into a horse race. As often happens with simplistic measures, though, it doesn't say much.

Image: RGBStock.com user RWLinder, site standard license.