Apple's Market Cap Is High Because Its Profits Are High

A blog about business and economics.
Aug. 29 2012 3:02 PM

Apple's Market Cap Is High Because Its Profits Are High

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This month, Apple obtained a market capitalization that beat the previous (nominal) market cap record set by Microsoft back in 1999. Since Apple and Microsoft are both tech companies and longtime rivals, there's a natural tendency to analogize the two share prices. But Felix Salmon has a chart that should put that kind of talk to rest.

What you see here is market capitalization (the total value of all the outstanding stock in the enterprise) on the y axis, and price/earnings ratio on the x axis. Microsoft is in red and Apple is in blue. What you see here is that while Apple has traded at sky-high P/E ratios at various points in time, its current sky-high total valuation doesn't reflect a high P/E ratio. Instead, Apple's currently in the 15-20 neighborhood where you expect a mature company to be. By contrast, when Microsoft was at its $600 billion peak it had an extremely aggressive P/E ratio.

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That's to say that the two $600 billion juggernauts are very different in nature. Peak Microsoft was about extraordinary optimism about Microsoft's potential for growth, which is why the stock price is much lower today even though it's still a very impressive and successful company. Merely staying successful and impressive couldn't justify that kind of 70-80 P/E ratio. Apple, by contrast, is worth more than $600 billion simply because its current profits are enormous. The share price reflects optimism about Apple's ability to sustain its current position, but doesn't involve any kind of extraordinary claims about future growth.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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