The Value of Growth - Apple, Microsoft, Exxon
- Apple is worth more than Microsoft today, even though Microsoft is larger, because it has better growth prospects
- Apple is closing in on the most valuable company in the world - Exxon
- Exxon's value is stalled because it has no growth markets
- Exxon once developed, then abandoned, a growth business called Exxon Office Systems
- Apple's value may eclipse Exxon, which has almost 8 times the revenue, because its growth prospects are so bright
- Profitable growth is worth more than monopolistic market share - or even huge revenue
We all know that over the last 10 years Apple has moved from the brink of bankruptcy to great success. Apple has been able to dramatically increase its revenues, growing at double-digit rates for several years. And Apple now competes in markets like mobile computing and entertainment where its hardware and software products are demonstrating a leading position as users migrate toward different platforms (iPods and downloadable music or video, iPads and downloadable video or text, iPhones and downloadable apps of all sorts).
Because of this profitable growth, Apple's market value now exceeds Microsoft's. An accomplishment nobody predicted a decade ago.
As this chart from Silicon Alley Insider shows, Apple's profitable revenue growth has allowed its value to soar. Even though Microsoft is larger, and dominates its market of PC operating systems and office automation software, its value has stalled due to lack of growth. Because Apple is in very large, emerging markets with successful products it is generating a very high valuation.
In fact, Apple's market cap is closing in on the most valuable company in the world - Exxon:
Source: Silicon Alley Insider
Exxon and Apple have nothing in common. Exxon is a petroleum company. It's growth almost all from acquisition. You could say it's nonsensical to compare the two.
But for those of us with long memories, we can remember in the early 1980s when Exxon opened Exxon Office Systems. As the price of crude oil, and its refined products, hit record highs Exxon made record profits. Leadership invested a few billion dollars into creating a new business intended to compete with IBM and Xerox - leading office equipment companies of the time. But, when the price of crude oil fell Exxon abandoned this venture - by then already achieving more than $1B/year in revenue. All the suppliers and customers were left in the lurch, and the employees were left looking for new jobs. Within weeks Exxon Office Products disappeared.
Exxon abandoned its opportunity for growth into new markets in order to "focus" on its "core" business of oil exploration and production, oil refining, and marketing of petroleum products. As a result, Exxon - augmented via its many acquisitions across the years - is now the world's largest "oil" company as well as the world's highest market capitalization company. But it has no growth. And thus, its value is totally dependent upon the price of oil - a commodity. Over the last 2 years this has caused Exxon's value to decline.
At $43B in 2009, Apple has nowhere near the revenue of Exxon's $310B. But what Apple has is new markets, and growth. Someday we'll run out of oil (long time yet, to be sure). What will Exxon do then? But in the case of Apple we already know there will be future revenues from all the new products for a long time after the Mac has run its course and disappeared from backpacks. It's that willingness to seek out new markets, to develop new products for emerging markets and constantly push for new, profitable revenues that makes Apple worth so much.
Could Apple become the world's most valuable company? Possibly. If so, it won't be from industry domination. That sort of monopolistic thinking drove the industrial era, and companies like AT&T as well as Exxon -- and Microsoft. What's worth more today than monopolism is entering new markets and generating profitable growth. It's what once made the original Standard Oil worth so much, and it initially made Microsoft worth more than any other tech company. Too many of us forget that profitable growth, more than anything else, generates huge value and wealth. And that's true in spades in 2010!