Its Official…Apple is worth more than Microsoft!

steve-jobsAnd now it really is official, Apple’s market capitalization is now bigger than Microsoft’s (at least for the time being). Not only that, but the value of its actual business is also higher than Microsoft.

Specifically, Apple’s business is now worth $200 billion, while Microsoft’s is only worth $197 billion–at least by one simple calculation of enterprise value.*

What’s the difference between a company’s stock market capitalization and the value of its actual business (which is referred to as “enterprise value”)?

A company’s stock market capitalization includes the net value of the cash and debt on the company’s books. To figure out the imputed value of the company’s actual business, therefore, you have to adjust for the value of those other things.

As an example, consider a company with a market capitalization of $1 billion that has $500 million of cash and no debt. If you were to buy all of the stock in this company, you would spend $1 billion. When you bought the company, however, you would also acquire the $500 million of cash that came with it, so your net purchase price would only be $500 million. So the company’s actual business, in this case, would have been worth only $500 million.

chart of the dat, apple, microsoft market capitalization, may 2010If the same company had a $1 billion market capitalization, $500 million of cash, and $500 million of debt, meanwhile, the company’s business (“enterprise value”) would be $1 billion. You would get the $500 million of cash, but you’d also have to pay off the $500 million of debt, so the net cost to buy the company would be $1 billion.

Apple had a market capitalization of $223 billion. Apple has $23 billion of cash and no debt. Apple’s enterprise value, therefore, is $200 billion Microsoft, meanwhile, had a market capitalization of $219 billion. Microsoft has $37 billion of cash and $6 billion of debt. Microsoft’s enterprise value, therefore, is $188 billion (per Yahoo Finance).

So, it’s official: Apple is now worth more than Microsoft. The only American company with a market cap greater than Apple is Exxon Mobil. A remarkable and somewhat ironic milestone considering it was Microsoft that breathed new life into a struggling Apple back in 1997 with a $150 million investment in the company. What was it Bill Gates said at the time? “We think Apple makes a huge contribution in the computer industry. And we think it’s going to be a lot of fun helping out.”

Yahoo Finance’s simple calculation of enterprise value is standard, but a more detailed analysis of Apple’s liquid assets shows that the market still values Microsoft’s business more highly than Apple’s. I apologize for jumping the gun.

There are a few more details about this that I would like to note…please read this to find out how apple managed to achieve this mighty fit.


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