2 posts • joined Saturday 25th September 2010 00:49 GMT
Market Cap is not a fair measure of company size
Market cap is simply a measure of what shareholders value a company at.
Unfortunately a comparison of Apple shares vs Microsoft and Intel shares isn't exactly fair as there is a key difference between them: Apple does not pay dividends.
For shareholder return on investment, they can only sell for a profit, which drives the share price up. As Apple is the golden boy of the market, prices will remain high, and people will continue to drive up share prices. But this means Apple's valuation is artificially high.
For a better indication of company size, try looking at equity (total assets minus liabilities). Apple may have a wickedly high market capitalization, but it has a smaller equity than Intel.
Market cap != Company Size
Journalists are very quick to throw around Apple's market capitalization as a figure of total company size. Market capitalization is simply one indication. It is more a market perception of value than an actual value/book value.
What a lot of people don't realise is that unlike most other companies, Apple does not pay dividends (and hasn't since 1995). This keeps it sitting on a huge cash reserve. Even given this huge cash reserve, the market cap is around 6 times it's book value.
Due to the lack of dividends, for a return on investment shareholders are far more likely to hold onto shares and that creates a somewhat artificial scarcity of shares and that in turn drives up the price. Due to the simple fact that Apple does not and will not pay dividends, a comparison of company size on market cap alone is not entirely fair.
I do not deny that Apple is a large company, but I do believe that it is quite over valued. In these times, many people are looking for a secure investment and typically companies with high market caps are considered to be quite safe, especially with Apple's 'Reality Distortion Field'. I think in Apple's case, it is too high and it could be set for a bit of a tumble.
But that is just my $0.02.