Microsoft left searching for answers as Google maps out market gains

FOR Microsoft, it was bad enough when Apple's sharemarket value surpassed its own in 2010. Now Google, a company that didn't even exist 15 years ago, just did the same thing.

By InvestSMART · 3 Oct 2012

By InvestSMART ·
3 Oct 2012

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FOR Microsoft, it was bad enough when Apple's sharemarket value surpassed its own in 2010. Now Google, a company that didn't even exist 15 years ago, just did the same thing.

Earlier this week a slight bump in Google's share price and a drop in Microsoft's gave Google a market capitalisation of $US249.19 billion ($241.8 billion), just ahead of Microsoft's $US247.44 billion. Google's market value also edged past that of Wal-Mart Stores, making it the third most valuable US company behind Apple and Exxon Mobil. Market value is determined by multiplying a company's stock price by the number of shares it has outstanding.

It was one more sign that the technology industry has entered what some call a post-PC era. Investors are becoming more bullish on the growth opportunities for Google, a company whose fortunes are predicated on the internet and, increasingly, on mobile devices and services.

Microsoft, meanwhile, has not been able to shake the view that its software business is still largely beholden, in one way or another, to the PC, a technology that is now looking stale next to younger, faster-growing devices like the smartphone and tablet. Microsoft's software business, although still highly profitable, is not growing the way it once was.

Microsoft once had one of the technology industry's highest-flying stocks, but its shares have stagnated over the past decade after many big investments by the company, especially in the consumer market, failed to pay off. Its Bing search engine is a big money-loser and a distant second in the market behind Google. Its mobile software business has been marginalised by Apple and Google with their iPhone and Android products.

Google's attempts to find other sources of revenue, like display and mobile ads, have potential. But many investors have not been convinced because it takes new businesses some time to grow and because a business must be very profitable to be more than a drop in the bucket of Google's earnings from search ads. At the same time, Google's experiments, like self-driving cars or Groupon-style deals, make some worry that it is throwing money at the wrong places.

Google is expected to topple Facebook and Yahoo! this year as the leader in online display advertising, bringing in $US2.31 billion in display ad revenue, according to eMarketer.

Microsoft's revenues are still larger than those of Google and are likely to remain so for a while.

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Frequently Asked Questions about this Article…

What happened when Google’s market cap briefly surpassed Microsoft’s?

Recently a small rise in Google’s share price combined with a drop in Microsoft’s pushed Google’s market capitalisation to about US$249.19 billion, just ahead of Microsoft’s roughly US$247.44 billion. That move made Google the third-most valuable US company, edging past Wal‑Mart and sitting behind Apple and Exxon Mobil.

How is market value (market capitalisation) calculated and why did Google overtake Microsoft?

Market value is calculated by multiplying a company’s stock price by the number of shares it has outstanding. In this case a slight bump in Google’s stock and a dip in Microsoft’s stock changed those totals enough for Google’s market value to move ahead of Microsoft’s.

Why are investors becoming more bullish on Google’s growth prospects?

Investors see growth opportunities for Google because its business is tied to the internet and increasingly to mobile devices and services. Google is also expanding into display and mobile advertising, areas where analysts expect strong revenue potential.

What weaknesses in Microsoft’s business have worried investors?

The article notes Microsoft is still viewed as largely tied to the PC, a market that looks less dynamic next to smartphones and tablets. Its software business remains profitable but isn’t growing like it used to, some big consumer investments haven’t paid off, and Bing and Microsoft’s mobile software have lagged behind competitors.

How does the shift to a post‑PC era affect everyday investors thinking about Microsoft and Google?

The post‑PC trend highlights firms exposed to mobile and internet growth. For investors, Google’s positioning in internet and mobile services explains bullish sentiment, while Microsoft’s legacy ties to the PC help explain caution even though Microsoft still generates larger revenues.

Is Google successfully diversifying revenue beyond search ads?

Google is pursuing other revenue streams such as display and mobile ads, which have clear potential. However, the article cautions many investors aren’t fully convinced yet because new businesses take time to scale and must become very profitable to meaningfully add to Google’s search-ad earnings.

Will Google become the leader in online display advertising over Facebook and Yahoo?

According to eMarketer cited in the article, Google is expected to overtake Facebook and Yahoo to lead online display advertising, with forecast display ad revenue of about US$2.31 billion.

Does Microsoft still earn more revenue than Google, and should investors care?

Yes — the article points out Microsoft’s revenues are still larger than Google’s and are likely to remain so for a while. For investors, that underscores a difference between current scale (Microsoft) and perceived growth opportunities (Google).