Ever since Apple (AAPL) passed Microsoft (MSFT) in market value, I’ve been thinking about the vast disparity in their profits. The two companies have similar valuations ($231 billion for Apple, $223 billion for Microsoft), yet Microsoft is far more profitable. In the last 12 months Microsoft has made more than $17 billion. Apple’s profits are a bit under $11 billion.
Think about that for a moment. Investors are willing to pay more for a dollar of profits at Apple than at Microsoft, and not a little more. A lot more. Obviously, the market values Apple for its growth. But that’s only part of the explanation. Microsoft is growing too, yet investors value Apple at more than 16 times its forecasted 2011 earnings, while Microsoft fetches just 11 times next year’s projected profits. (Microsoft’s revenues are bigger than Apple’s too, but not by as wide a margin, $59.5 billion versus $51.1 billion.)
The explanations are positive and negative, and neither works in Microsoft’s favor. On the negative side, investors have put Microsoft in the penalty box for its fumbles. It loses billions chasing Google (GOOG) in online search advertising. It is nowhere on mobile software, despite having been first to the game. By years. Had Windows 7 been as bad as Vista, the story could have been even worse.
The real story, though, is the premium investors are willing to pay for Apple’s innovation. The company has transformed itself from a niche also-ran in personal computers to the technology industry’s innovation leader bar none. Apple re-defined multiple industries in the past decade and doesn’t appear to be slowing down. Music distribution, portable music players, telephones, handheld computers. Investors wonder what’s next. Televisions? Stereos? Automobiles?
The pendulum swings, of course. There was a time when only true fans raved about Apple, and Wall Street tut-tutted its limited appeal. Today, everyone loves Apple. But investors show their love in a particularly numerate way. The innovation premium doesn’t lie. In the case of Apple versus Microsoft, it is stunning.
On another matter altogether …
I appear regularly on the Saturday morning Fox News program Cavuto on Business, where we often discuss how the U.S. will solve its seemingly intractable problem of entitlement spending. I have pointed out several times that the problem is complex and yet incredibly simple. When the situation becomes bad enough, we’ll simply cut benefits and raise the retirement age. That’s exactly what France announced over the weekend it would do. When will the U.S. do the same? I wish I knew.