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How can Apple be worth more than Dell?


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January 20, 2006

How can Apple be worth more than Dell?

Peter Burrows

I'm still digesting the news that Apple's market cap has exceeded Dell's. Given that Dell was for darn near twenty years the PC company doing all the exceeding from a stock market perspective, this is clearly an occasion worth thinking about (for that matter, it's also pretty shocking that HP now trades at a higher P/E ratio than almighty IBM, but I'll think on that over at the Tech Beat blog some time).

So what does Apple's market cap ascension mean?

As I listened to the Apple call with Wall Street analysts the other day, I kept thinking it comes down to one thing: runway. For me, that's the metaphor that best describes the difference between the firms. Apple is roaring down its runway at a blazing clip, yet it's got miles ahead of it to grow just by pursuing its current plan and exploiting its current capabilities. But Dell, which has been the poster child for this kind of analysis since George Bush Sr. was prez, is suddenly looking like it's running out of room.

Now, I realize Dell is nearly four times Apple's size--and size is a major determinant of market cap. But if you don't have big honking growth markets waiting to be harvested, size can be a heavy anchor indeed. The math is simple. To deliver 15% growth in the upcoming year, $55 billion-a-year Dell has to find $8.25 billion in extra sales. But Apple, at $13.9 billion in overall sales, would have to find just $2 billion.

Size is a burden in other ways as well. As they grow, every company in the history of companies has at some point found it impossible to find enough new markets to keep their runway extending out ahead of them. Jim Mackey, director of development at The Woodside Institute, has done research showing that no big products company has ever grown past $40 billion without suffering a big, nasty slowdown. That seems to be hitting Dell in some regards. Sure, Dell is doing great in printers. But its efforts to take on Cisco in networking, IBM and HP in blades and higher-end servers, and yes, Apple in MP3 players, haven't followed suit. And heck, Cisco is a behemoth that is attacking every adjacent market it can find, and doing a pretty great job of it--and even it can't grow enough to convince its investors that its still a growth stock.

Part of the problem is that when you've got to find such huge gobs of extra sales, it's hard to throw a lot of resources at any brand new thing--because odds are nearly nil that it will be big enough to move the revenue needle much. I'll never forget talking to one high-ranking Dell executive a couple of years ago. The iPod was just starting to take off, and the media infatuation with the story was picking up. After I'd asked my third or fourth question about how the Dell DJ stacked up to the iPod, the excecutive got visibly frustrated and went on a rant about how silly it is that reporters are consumed with a company that is just a nit compared to Dell. As for the iPod, he thought all the hoopla was ridiculous, given that the entire MP3 player market was projected to be just $1 billion or so that year. "It's a fine product, but why would we want to focus [much energy] on that little stuff. It's like being the being the King of MousePads!"

That may be rational thinking if your job is to find $15 billion in extra sales each year. But that same rationaliy means Dell is unlikely to ever pioneer a goldmine like the iPod--which analysts think could bring in $10 billion in 2006! That's a mongo number, no matter who you are. And oh by the way, its helped Apple open up a huge lead over Dell in terms of profitability as well, as Om Malik pointed out in a great post the other day. And profits, at the end of the day, is what investors want.

So what about Apple's growth prospects? Clearly, it's got more potential runways ahead of it than all of us bloggers can count, almost. There's talk of some kind of Mobile Me device, likely an iPhone of some sort. The company could clearly do a media center for the living room, or even a full-blown iTheater-style gizmo for you well-heeled movie lovers out there. And who knows what else.

Then there's the PC biz itself. Suddenly, Apple seems to have bumped Dell out of its traditional role as "company-most-likely-to-gain-boatloads-of-share." OK, no one is talking about Apple zooming from its current 3.3% of the world market to double digits anytime soon. But every point of the $250 billion PC industry is worth $2.5 billion. So if Apple gains a point of market share this year--not a pipe dream by any means, especially given the Intel transition--Jobs & Co. will have already found the fuel for that 15% revenue growth year. And that's without any iPod sales growth.

I'm not saying Apple's shares aren't overheated. They may well be. But while Apple's smallness was formerly a life-threatening problem, it suddenly seems like a big advantage. I guess that's just how the math works these days, when Steve Jobs' reality distortion field seems to have morphed into something else: reality.

09:25 AM

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I think this is the year people will finally begin to ask themselves why they stick with Windows. With manifold security problems and the fact that Vista's most touted features are old hat to Mac users, I think we are reaching a tipping point, where the cost of using a Mac is going down, while the cost of toughing it out with Windows keeps going up. This may be unsustainable. All we need is for one or two fortune 500 companies to publicly upgrade to Mac and the dam will break; all of a sudden Apple will go from a measly 5% marketshare to something much higher. People will become more productive; IT support costs will plummet.

Posted by: thomas Barta at January 20, 2006 05:02 PM

Where did you learn that "size is a major determinant of market cap"?

There might be a correlation between [companies that survive long enough to get big] and [companies that are highly valued], but size most definitely does not determine your market cap.

Market cap is the value the market places on your business. Ability to grow revenue, control costs, and exploit new markets are all factors that determine the value placed on your stock. The size a company happens to be is immaterial.

Posted by: DanielEran at January 20, 2006 06:36 PM

Back in MWSF 2000 or 2001, Jobs said that it was Apple's goal to be one of the ten biggest Internet companies in the world. Apple online store was step 1. iTMS is step 2, and its still in its infancy. .Mac is the very beginning of step 3 - Mobile Me might be a natural expansion of it. The future is very bright.

Posted by: mark at January 20, 2006 06:46 PM

I have to agree with the previous post. I think that with the cost of all the malware, adware, viruses, and the like out there and the damage they do to computer users, this is going to be a huge factor in how people decide on their next computer. Vista is due at the then of '06, if you can believe that, with nothing new to Mac users, yet a patch has already come out. Consumers may start to look at what's already out there, without the associated viruses, interruptions, spyware, trojans and adware that's bound to show up with VISTA.

"Viruses have caused significant pain for computer users. The FBI on Thursday said computer crime cost U.S. businesses $67.2 billion over a 12-month period, with viruses and worms the biggest culprits." -cnet news.com

Think long and hard before you make that purchase!!!

Posted by: salanai h at January 20, 2006 06:47 PM

Vista's features fall into three categories:

1. copied

2. demoed

3. cut

"Shipped" has not yet made the list.

Posted by: sillyputty at January 20, 2006 07:14 PM

The real reasons to Apple's share valuation are:

1) Exploiting new markets: iPods, digital music, internet services, software. There's a reason we now pay for iLife and .mac when it used to be free.

2) All aspects of Apple's business are profitable: They don't sell iPods at a loss to enourage people to buy music, they don't run the music store at a loss to drive iPod sales, they don' t run the retail stores at a loss to encourage traffic and they don't develop software at a loss to boost Mac sales.

3) All aspects of Apple's business are growing and growing profitably. It's easy in business (GM, Ford) to increase sales by cutting prices; effectively buying growth. Apple doesn't do that.

4) The trajectory looks oh-so rosy. Digital hardware devices need intellegent software to make the user experience positive. After years of telling Apple to choose whether it wants to be a hardware company or a software company, some anal-ysts are FINALLY getting it that it pays to be really good at both.

Posted by: Vladislav Tretiak at January 20, 2006 07:27 PM

How can Apple be worth more than Dell? It's instilling Brand Loyalty in their customer base. The company can be Big or Small it doesn't matter. Dell's biggest, and most often shown commercials, are about how great their customer service department can serve you.

How do commercials like that give someone the confidence in the product they're buying. If Dell would just make products that were built well enough, they wouldn't need to worry about advertising how good their customer care is. If Dell would just focus on building their products with care and thought toward what customers really want - they could continue making those profit gains. The advantage Apple has is that in the computer world, they control all aspects of how their customers interact with the hardware and the software they sell. Dell on the other hand is at the mercy of Microsoft (or any other OS) and whatever software companies that provide programs for their computers.

Apple, on the other hand, if it feels the world is not giving their customers the "Apple Treatment" they go and create that need for their costumers and integrate that need into the products they sell. I believe if Apple were in Dell's position right now market wise but continued to innovate, create, and strengthen Brand Loyalty in their customer base - Apple would continue making a steady gain in the market regardless of their company's size.

Posted by: dragonopolis at January 21, 2006 02:44 AM

The Mac and Apple is looking good for many reasons. I knew 3 years ago to invest in Apple, even before the iPod, because of the culture of innovation. Dell embodied the culture of efficiency. Innovation, well managed, never markets itself out of existence. It also does not suffer from the law of diminishing returns. Dell's business model optimizes return in the short term, but just like doing pull-ups, it becomes harder and harder to significantly increase your best efforts.

And Dell doesn't do anything that someone else won't do better, for cheaper ... Apple does.

Posted by: MacGregor at January 21, 2006 03:26 AM

I also agree that Vista will drive Mac sales. Many PC users (myself included) are limping along with old hardware and either W98 or XP. Vista will REQUIRE a hardware upgrade for us. If we have to make a hardware investment anyway, why not consider Mac? Especially if the switch to Intel makes it easier/faster to run Windows apps through dual boot/VPC/WINE or some other method.

Posted by: Bill at January 21, 2006 11:10 AM

Many people simply do not understand

what the Apple?s iPod is, and what is

today?s electorinic gizmos. Basically,

its just a set of dirty cheap silicon

chips (usually manufactured in China)

plus SOFTWARE. Software is a brain of

electorincs, software is the entity

which make silicon something useful.

One can take $100 box, add software,

and sell for $10,000 if the market

have demand for it. So, the iPod is not

being driven by Apple brand (although

in small degree is), but by iTunes Music

store. Apple was one of the last, which

enter online music business, but one of

the best. So anyone who will try to

compete with iPod with better specs,

lower price will certainly fail. In

fact, Sony (and its branch Sony BMG)

were the ones who could make iPod not

to appear at all. But Sony BMG was

intested to sell CDs for $10-$15, and

not single tracks for $1.

Posted by: Andrei Verovski (aka MacGuru) at January 21, 2006 11:20 AM

Dell and Apple are two different types of companies.

Dell has said in the past that they are a distribution company - and it's starting to show. Dell can also be replaced in any workplace with HP or any other company - there is nothing unique about them.

Apple, on the other hand, drops about half a billion a year on R&D to both improve their runway and lengthen it. To a degree they work in isolation and are able to focus on OS X, iLife, etc. without concerns about what MS is doing.

Posted by: Ken McLaughlin at January 21, 2006 01:43 PM

"some anal-ysts are FINALLY getting it that it pays to be really good at both."

Note that Google is successful because it does HW and SW. Oh, yah and by the way, they do great math.

People aren't interested in SW or HW. They are intrested in getting their problems solved or having a great user experience.

Posted by: Robert Lucente at January 21, 2006 05:09 PM

In other words, Apple's market cap is beginning to reflect its value to the industry and the consumer. Think of ANY other computer manufacturer disappearing, either by folding or by losing identity through merger, the way DEC and then Compaq and now IBM's PC division disappeared. Would that alter the pace of innovation by one iota? Zilch! Now think about where the computer industry would stand had Apple disappeared twenty, ten, or five years ago. "Think different" indeed.

Posted by: Chris Lucianu at January 21, 2006 07:45 PM

1) Size of a company is directly related to market cap.

Market cap is a valuation of the company -- that is a valuation of the companies profits today and tommorow. Big company with big profits is worth much more than small company with small profits. Remember PROFITS, PROFITS, PROFITS. Sometimes a smaller company's market cap is larger than a bigger company but only because the investors beleive that the comapny will grow BIGGER and have BIGGER PROFITS. See how size and profitability have everything to do with marketcap.

In fact, that's have you routinely value a company. Take a multiple of its profits or a multiple of its revenue and there's your company value or market cap. The size of a company, the size of its revenue, and particularly the size of its profit are the value of the company. The only financial value of a company is it's value to create money, that is profits in the future. These future profits can be nicely estimated by profits it is earning today plus any additional profits that may come from growing the business to a bigger size.

Anyone who doesn't beleive that size of revenue and profits are not important, I've got a few Internet stocks from the 1990's to sell you. Can you beleive these people were justifying market cap with eyeballs and click-thrus instead of justifying market cap with good old-fashioned CASH, BIG CASH, which is by far the best way to value a company. The CASH you make (the bigger you are), the more you're worth.

Of course, take away the profits, and you've found the exception that proves the rule. For example, the airlines losing billions; and the old car makers, steel makers, and any old manufacting compnay stuck with legacy costs like very expensive pension and retired health care costs. These very high costs associated with these very big companies' former bigness are erasing profitability. Take away profitability and eventually you take away the company. All these old companies will either go bankrupt and erase all these legacy obligations to seniors who worked hard for them for decades or they're going to go bankrupt and out of business. Either way, all those seniors who worked hard for many years will be left with reduced pensions and health benefits, if they are left with any at all. Because the large compnies of yesteryear with all those costs are often much SMALLER today with SMALLER PROFITS and can no longer afford all those BIG costs.

Important side note: Stay away from fixed pensions and get all your retirement funds in an account with your name on it: 401k, Roth IRA. Whatever you call your fund; it should have your name on it and be collectable only by you, your wife and your kids.

ALL THIS TO SAY THAT THE SIZE OF A COMPANY AND ESPECIALLY THE SIZE OF ITS PROFITS----> IS THE ONLY THING THAT CAN JUSTIFY ITS WORTH -- THAT IS ITS' MARKET CAP. Get it. Very simple.

So there are a lot of people out there that essentially are betting that Apple will get bigger and have bigger profits. So either Apple will get bigger and have bigger profits, or its market cap will eventually become smaller and so will the price of its shares get smaller.

Let make it easy.

BIG COMPANY ---> BIG PRICE

SMALL COMPANY ---> SMALL PRICE

If we learned nothing from the Internet Stock Bubble Burst, we learned this simple little rule. Either get big and make big profit, or be worth nothing and go out of business.

Posted by: Realtosh at January 21, 2006 11:55 PM

You miss the point, some time it is possible for a smaller company to make bigger profits than a larger company. Smaller companies, if managed correctly and in the right business, can make larger profit margins. Larger profit margins equal larger profits. Also, Apple is not exactly a tiny company, it isn't Dell, but it is Fortune 500.

Posted by: ltieman at January 22, 2006 03:48 AM

Users have finally accepted an oxymoron: computers are not hell... when in comes to Mac.

Posted by: frank sternel at January 23, 2006 09:01 AM

Peter Burrows said "size is a major determinant of market cap", not "THE determinant". This is obviously true. Market cap = #shares * price/share. This total amount is how the market values the company and is a function of current assets and future prospects. Certainly a 20 person corporation with $2M in revenues cannot have the market cap of Dell. There won't be eough shares outstanding for one thing.

Regardless, the market thinks Apple has plenty of upside while Dell has hit the diminishing returns stage.

Posted by: Jim Stead at January 23, 2006 02:39 PM

Larger profits = larger profits

Larger profits margins only = larger profits margins

These two are not the same; they are very distinct.

There is nothing inherently more valuable about larger profit margins independent from the actual volume of total profits.

If you gross profit margins are 90% but you only generate $150,000/yr from your hot dog selling business you're not in the same league as DELL or Apple with much smaller margins, because they generate billions of dollars in PROFITS, earning, cash, money, cash flow, or whatever you want to call it. They make money, a lot of money.

CASH is King. If you can generate it, then you have value. If you can generate a lot of cash, then you have a lot of value.

Posted by: Realtosh at January 24, 2006 04:32 PM

Bottom line: My Dell laptop keyboard doesn't work after only 5 years and Windows crashes daily. My next PC is Macintosh.

Posted by: David Ross at January 27, 2006 03:58 PM

For Bottom line:

I would like to see your Mac laptop after 5 years working at all or even able to use the latest softwear of 2011!!!

My multiple Windows desktops and laptops are just fine and I have not had a OS failure in years. Hardware failure is to be expected.

Keyboard failure after 5 years can be repaired if you can get the parts.

When was the last time you reinstalled Windows?

Get with the program and do some hardware and software maintenance and stop whinning!!!

Posted by: GotMojo at November 15, 2006 01:55 AM

What all these comments show is that Apple is a great short sale. All the good news that ever might come out is in the price already.

Posted by: anon at November 16, 2006 11:35 AM

How many of your 5 year old windows desktops will run Vista?

Windows current OS is old as dirt. Of course they can run the 5 year old software on the 5 year old hardware.

Posted by: bob at November 17, 2006 07:27 PM

so in the end which is bether? MAC or PC????

Posted by: Demus at November 21, 2006 02:04 AM

"so in the end which is bether? MAC or PC????"

That argument doesn't exist anymore. The new question is: "which is better? Mac and PC or just plain old PC?"

You see, the Mac today does both. You get two computers in one.

For about the same price, and in many cases the Mac is actually cheaper than a Dell.

Posted by: Tony Martin at November 21, 2006 03:15 PM


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