Why Is Google Worth More?

Yesterday Google?s market capitalization surpassed Microsoft?s for the first time, even though Microsoft had almost 50% more revenue last year than Google. Is it right that Google is Wall Street?s darling, while Microsoft is in the doghouse?

As the New York Times reports, by Wall Street?s close yesterday, Google?s stock price had risen and Microsoft?s fell, giving Google a total market capitalization of $249.19 billion, compared to $247.44 billion for Microsoft. This, despite the fact that in the year ending June 30, Microsoft had $18.06 billion in revenue to Google?s $12.21 billion, nearly 50% more.

Why the apparent disconnect? It?s because Wall Street favors, above almost all else, potential growth. When it looks at Google it sees growth. When it looks at Microsoft, it sees stagnation. The Times notes that for a while until the beginning of this year, Wall Street had been somewhat cool on Google, because the company was solely reliant on search ads for revenue, and because it worried that Google was throwing away money on too many side projects that didn?t pay off.

That changed when Google showed that it had strength in display ads and mobile ads, and when it began cutting back on unprofitable offshoots. The Times says:

Google is beginning to convince investors that it is more than a one-trick pony. There is evidence that it has successfully expanded beyond search ads, including with display ads on YouTube and mobile ads on Android phones and other devices. The stock is up 18 percent this year.

As for Microsoft, its stock price has been stagnant for a decade, generally bumping along at $30 and under. The company hasn?t been able to make significant headway against Google in search, and has lost out in mobile to iOS and Android, a big growth area.

Because of this, Wall Street expects Google to grow far faster than Microsoft, 27% for Google next year compared to the high single digits for Microsoft, according to the Times.

But some stock analysts beleive that Microsoft may be undervalued. Andrew Lange of Morningstar, for example, told USA Today that he thinks based on the fundamentals, Microsoft stock should be selling at $35 rather than the $30 and under it?s generally been selling for.

The next several months will go a long way towards seeing whether Microsoft can get back to big growth numbers and boost its valuation beyond Google for the long term. If Windows 8, Windows 8 tablets, and Windows 8 Phone are hits, big growth days could be ahead. If not, Google?s market valuation will likely leave Microsoft?s in the dust.

Source : Computer World


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