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The Microsoft Comes Around
Just as Apple fades into low-growth, high-profits…
Note: this post was adapted from my newsletter published earlier this week. Those interested can sign up here.
A funny thing happened a couple weeks back: Microsoft became the most valuable company in terms of market capitalization. As a reminder, it’s 2018. Not 1998. This was not supposed to happen.
It feels like a decade ago that Apple surpassed Microsoft in every meaningful business metric. (And to be fair, it was nine years ago that they surpassed Microsoft in market cap.) Then Apple went on to take down the behemoth (at the time) Exxon, to become the most valuable company. And that continued for years, culminating in Apple becoming the first company to sail past the trillion dollar valuation earlier this year. There was simply no stopping Apple. In fact, the only way they were going to get overtaken was because Amazon was growing even faster, as they too surpassed the $1 trillion mark.
And yet, here we are. Today, Microsoft is worth some $33 billion more than Apple. And $30 billion more than Amazon. Microsoft, at $833 billion, is once again the stock market king.
But why? And how? Well, beyond the obvious falls of Apple and Amazon (relatively speaking, of course), Microsoft has fared far better in the broader market sell-off of recent weeks and months. But there’s clearly something more fundamental going on: Microsoft is back in growth mode.
After the lost decade of Steve Ballmer, it seemed impossible to think Microsoft would ever return to such growth. Sure, Ballmer figured out how to milk the profits, but Wall Street wasn’t buying it. Literally. And neither was the public, as the consumer side of the business was left for dead. From laughing at the iPhone to buying Nokia on his way out the door, Ballmer tried his damndest to torpedo the company.
Then in walked Satya Nadella with a crazy plan: forget selling packaged software, we’re a services business now. This general game plan has worked in the past, with IBM a couple decades ago,¹ and more recently with Adobe.²
And Microsoft’s cloud success has allowed the company to have the time to bolster and mature the products it seemed like they probably should have killed long ago, such as the Surface line and even Bing! While the Xbox still seems like a boondoggle, there’s even an important growth and strategic story there if the future of gaming is streaming from the cloud to svelte hardware. No company seems as well primed for such a future given Azure. We’ll see.
There’s a long-standing joke amongst Apple-watchers about the company being “doomed”. Basically, it has been said about Apple every single year since it was actually doomed, all those years ago. Of course, as noted above, Apple has thrived in a way no other company has before them. But we are now seeing a world in which Apple falls. Not doomed, mind you. But no longer the most valuable company in the world. Because the stock market is all about buying the future. And Apple’s growth has stalled.
And it will be very, very hard for them to get back to growth. Not because they’re not a great company, but because their key product, the iPhone, was one of the — if not the — greatest product ever, from a business perspective. It doesn’t just seem unlikely that they’ll be able to top it, it seems impossible.
I know that’s a risky thing to say. Especially about Apple. But again, it just speaks to the power of the iPhone. Apple is also now talking up the shift to services. And they undoubtedly have a few more tricks up their sleeve. But I just don’t think it will be enough. And so Apple will stagnate (again, from a growth-perspective and as such, a stock-perspective) and fully become a value stock, paying off big dividends. (Not that there’s anything wrong with that!) The company will remain insanely profitable. But right or wrong, that’s not what Wall Street values. And so they’ll likely have to stagnate for a long while before they too may be able to return to growth, in a new age where all ships (and financial bars) have risen to new heights (hopefully).
At least in part, Microsoft can grow again because Ballmer allowed — I’m being generous here; it’s the holidays — the company to stagnate for years. A larger overall market allowed them to outgrow their reliance on Windows. Of course, the iPhone is a much bigger business than Windows ever was. As such, it’s going to take time, a lot of time. Or something truly new and truly crazy.
This is likely how the era of Apple ends, not with a bang, but with a whimper. An insanely profitable whimper. In the shadow of an old, familiar foe.
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¹ Though with the latest Red Hat Hail Mary, we’ll see…
² This is also largely Dell’s current play as they aim to go public, yet again.