It's Official: Apple Is Now Worth More Than Microsoft*

From The Business Insider, May 26, 2010:

Apple's stock market capitalization (AAPL) has not yet quite surpassed Microsoft's (MSFT), but the value of its actual business is now higher.

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.

If 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.

As of yesterday's stock market close, 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 (per Yahoo Finance--see clarifying note below*).

Microsoft, meanwhile, had a market capitalization of $228 billion.  Microsoft has $37 billion of cash and $6 billion of debt (per Yahoo Finance).  Microsoft's enterprise value, therefore, is $197 billion.

So, it's official: Apple is now worth more than Microsoft.

(And if you don't consider this an absolutely remarkable turn of events, read this >.  It really puts the changing of the guard over the past decade in perspective.)

* As several sharp-eyed readers immediately noted (and we forgot), Apple has an unusual method of accounting for some of its cash on hand, which is that it classifies $18 billion of cash as a long-term investment.  (This is because the cash is invested in Treasuries with maturities of more than a year).  When this cash is included in the company's cash balance, Apple has $42 billion of cash, not $23 billion.  This reduces its enterprise value by $18 billion or so, which still puts it below Microsoft's, at least for a few more days.  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.  We apologize for jumping the gun!

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