Wednesday, October 3, 2012

Google (GOOG) Becomes the World’s Second Largest Tech Company


This week, search giant Google’s (GOOG) market cap surpassed Microsoft (MSFT), leaving the former market heavyweight further behind in a next generation race dominated by Apple’s (AAPL) iOS and Google’s Android devices. Google’s market cap has now grown to approximately $249.2 billion, edging past Microsoft’s $248.7 billion valuation. Many analysts view this decline as a sign of the times, with Microsoft’s traditional power base of desktop and laptop machines being disrupted by a new generation of tablets and smartphones operating on cloud-based applications.


Daily Chart


Weak earnings from Hewlett-Packard (HPQ) and Dell (DELL) have confirmed this trend, which reflect a decline in traditional PC business on both the hardware and software levels. Wedge Partners analyst Martin Pyykkonen commented, “The transition here is pretty straightforward in terms of where things have moved to and certainly that’s cloud, that’s Web. Today, only Apple’s market cap of $632.9 billion tops Google in the technology sector.

When Apple passed Microsoft in 2010 to become the world’s largest technology company, Microsoft CEO Steve Ballmer quoted Benjamin Graham, stating, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” At the time, Ballmer assured journalists and investors that Microsoft was intrinsically more valuable than either Apple or Google. However, based on current trailing P/E ratios, Microsoft, Apple and Google are all fairly valued with respective ratios of 14.8, 15.7 and 22.5 – none of the stocks are fundamentally overvalued. Ironically, it appears that Ballmer was right – in the long run the market has fairly weighed these companies against his own.


In 2008, Ballmer famously mocked Google’s newly acquired Android operating system, commenting, “If I went to my shareholder meeting and said: Hey, we’ve just launched a new product that has no revenue model, I’m not sure that my investors would take that very well. But that’s kind of what Google’s telling their investors about Android.”


In the most recent quarter, Google’s Android operating system powered 52% of smartphones worldwide, up from 43% a year earlier. Apple is currently in second with 19%, while Microsoft has a tiny footprint of 2.7%. Meanwhile, Google controls 66% of the U.S. search market, while Microsoft’s Bing search engine holds 16%, despite Microsoft’s best efforts to coin “Bing” as a verb through product placement and advertisements. Google is also on track to overtake Facebook (FB: Charts, News) in the U.S. as the largest outlet for display advertising.


Google’s cloud-based Apps are also challenging Microsoft’s traditional revenue source from Office software, while its fledgling Chrome OS has been recognized as a threat to Microsoft’s core of Windows operating system revenue. Windows sales have also plunged as customers choose Android and iOS tablets over lower end Windows laptops. New hybrid tablets, which can be converted into laptops, such as Asus’ Transformer series, have also become a threat to traditional systems running Windows 7.


Microsoft has recognized this threat, which it intends to address with Windows 8, which is designed specifically for touch-screen technology. Microsoft’s new Surface tablet, which runs on the new operating system, is also intended to compete directly with iOS and Android devices. Google has also introduced its own tablet, the Nexus 7, which is intended to compete directly with Amazon’s (AMZN) Kindle Fire tablet, the best-selling Android tablet in the United States, rather than Microsoft’s Surface.

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