2011/05/24

Microsoft Troubles XII: IBM market cap re-overtakes MSFT

Update 1. Influential hedge-fund manager, David Einhorn president of Greenlight Capital, calls for Ballmer to stand aside.

Update 2. The MSFT board stands behind Ballmer, rejects David Einhorn's call to stand aside.

Einhorn has 9M MSFT shares (0.011%). He's bought because he thinks they're undervalued.
This could just be a media beat-up by him to make some money - the share price has increased.

Whatever the cause, this is a significant milestone.
The MSFT board has had to consciously and publicly defend their continued choice of Ballmer as CEO.




Original:
From Reuters, Bill Rigby,  SEATTLE, Mon May 23, 2011

IBM passes Microsoft's market cap after 15 years
Since the Internet technology bubble burst in 2000, the tables have been reversed and Microsoft's stock has been stagnant as investors doubt its ability to move beyond its Windows operating system and Office suite of software
An investor putting $100,000 into both stocks 10 years ago would now have about $143,000 in IBM stock and about $69,000 in Microsoft stock.
 According to Reuters data, Apple's market value stood at $309.2 billion on Monday, IBM at $203.8 billion and Microsoft at $203.7 billion.

IBM is now ranked fourth in terms of market value in the United States, behind oil giant Exxon Mobil Corp at $397.4 billion, Apple, and industrial and finance conglomerate General Electric Co at $205.6 billion.

The piece seems to give two different valuations of APPL, $309.2B vs $205.6B, but it is poor syntax in the 2nd para.

My takeaway from this piece:
  • MSFT (senior) management has failed woefully since 2000 to keep up with its Industry & Sector
  • The MSFT board has been "captured" by that management, and
  • the company is not being run in the best interests of the majority of stock-holders, large or small.

Look at MSFT's "financials",  they are rapidly approaching "product maturity" (as seen by a growth rate closer to the S&P 500 than their Industry & Sector), but their Gross Margin is way, way too high.

                                       Company    Industry    Sector    S&P 500
Sales - 5 Yr. Growth Rate          9.45    11.99         16.93      7.63
Gross Margin - 5 Yr. Avg.       80.31    68.90         39.98    31.07
Operating Margin - 5 Yr. Avg. 36.92    25.93         16.81    15.00
Revenue/Employee (TTM)         770,955    5,007,815    5,391,381    731,155
Net Income/Employee (TTM)    244,876    572,253          222,783      89,500

They are setting themselves up to be slammed by the first good "substitute" product.

The Internet completely changes the market dynamics of intangible goods - notably Software.
Not only does it reduce the "Cost of Sales" to a few cents, it prompts companies to adopt entirely new Revenue Models and be brave enough to let go of it's star performers.
ie. "what got us here won't get us there, to the next level".

If MSFT is forced to reduce it's Gross Margin to 40% (not even ~30%), it's ~$70B yearly Revenue collapses, and their amazing Profits become outstanding and irrecoverable losses.

APPL might have had a vision with new hardware types (like iPod, iPhone), but it had to embrace an entirely different sphere of operations to enable this: without iTunes, the APPL i-Revolution could not have happened.
APPL had the insight, people want content, the device is just a means to an end.

But most importantly, APPL has been prepared to let their own (new) products compete with its "core business". Computers are now under 25% of APPL's business, and falling. (But their market share in that line of business is growing).

GOOG demonstrates the power of the Internet marketing model, "bits are free" and that 'alternative' revenue models don't just work, they can be very profitable.
That it wasn't a fluke is proven by the demise of all the other search engine companies, including the front-runners and "first movers". GOOG was nowhere 15 years ago, now it's King of the Search.

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