The inevitable happened briefly Thursday:
was worth more than
. Why inevitable? Because, as the chart below shows, barring any disastrous blunders, Cisco
to pass the software giant -- even though Cisco's business is far less lucrative than the Microsoft monopoly. But there's a crucial area in which the two companies diverge. That's growth: Cisco's got it, and relatively speaking, Microsoft doesn't.
Cisco pulled ahead on Thursday, in a session that left shares of both companies up by 8%. Cisco's shares leapt to 77 13/16, a new high, on the day its 2-for-1 stock split took effect. Microsoft's stock finished at 111 7/8, its highest close since Jan. 18, propelled by the latest hint of a settlement in the company's federal antitrust suit. The shares remain 7% below their high reached on the penultimate day of 1999.
By most measures, Microsoft's market-cap crown should seem secure. Its $22 billion in revenue dwarfs Cisco's $15 billion. And Microsoft is more than twice as profitable. Indeed, although Cisco likes to say it really is a software company because of the value of what's inside its communications equipment, Microsoft's gross margins of 88% compared with Cisco's 65% shows which is the software company here.
It also shows which of the two companies is a monopoly and which isn't. Both companies have massive amounts of cash and investments, although Microsoft's holdings dwarf Cisco's. Finally, as the table shows, the average Microsoft employee even brings in more revenue than the average Cisco employee. The sales-per-employee figure is a favorite bragging point of Cisco's.
That brings us back, then, to growth rates. Former Microsoft Chief Financial Officer Greg Maffei used to warn Wall Street regularly that the Law of Big Numbers would catch up with Microsoft: A huge company simply cannot grow as quickly, in percentage terms, as smaller ones. Maffei's warnings mostly went unheeded as Microsoft managed to blow by revenue and earnings predictions. But that changed last year as the company's year-over-year quarterly revenue growth rate declined.
In the quarter ending Dec. 31, revenue growth was 18%, vs. 38% in the same quarter of 1998. Cisco, in contrast, rang up revenue growth of 53% in its most recent quarter ended Jan. 29, an awesome accomplishment for a company of its size.
This is why the market is willing to pay a heady 141 times trailing 12 months' earnings. Microsoft's price-to-earnings ratio, though inflated by standard measures (historically, analysts have looked for P/Es and growth rates to be about the same), is a relatively anemic 67 times trailing earnings.
One caveat: Before you start thinking Microsoft's momentum is going to shift into reverse, remember the effect of the company's product cycles. There were no major new products released last year. But the February release of industrial-strength operating system Windows 2000 should recharge Microsoft's growth rate -- but only gradually and not enough to keep it in the market-cap lead indefinitely.
The lesson learned has become part of the core curriculum for tech investors: Profitability is nice, but growth is better. Microsoft publicly is dead set against being broken up by the government. But imagine the individual P/Es of several well-managed Baby Bills, each turning in high growth rates on highly profitable revenue bases.
No, Jim, B2B Is Not a Fad
James J. Cramer
already has urged you, definitely read
take on B2B, that great, er, phenomenon of new companies helping businesses conduct online commerce with other businesses.
First, I frankly didn't recall that Seymour accurately
called the business-to-business, er, hullabaloo (I'm straining to avoid the words "craze," "fad" or "mania") back in March 1999. He was early, as good tech watchers are, by predicting that scads of initial public offerings would hit the market in 1999.
Last year was only the beginning of B2B, with a handful of first movers like
going public. This year, obviously, is when the B2B floodgates are opening. And therein lies our difference of opinion, which actually is smaller than it appears.
Like Seymour, I think B2B is a major event. New companies facilitating the buying and selling of goods and services electronically is a revolutionary breakthrough. It's further proof that the Internet really does change (almost) everything.
My quibbles with the current environment are twofold. First, the great debate is who will capture the revenue, the new exchanges/software providers or the companies doing the buying and selling. My bet is that while the companies facilitating these marketplaces will do exceedingly well, the players they're aiming to represent will do everything possible to keep the value in their own camps. As that becomes more apparent, I'm guessing valuations will become more reasonable.
Second, the coming IPO glut in B2B companies -- or companies calling themselves B2Bs -- will end up sinking more than a few. Investment banks slowly rewrote the rules of sponsoring IPOs during the first wave of the Internet by pumping out far more deals than they'd ever considered before. Now, the entire food chain from entrepreneur to venture capitalist to investment bank to retail investor is ready to field as many new IPOs as possible. And so that's why we're seeing "verticals" like metals (
) producing more exchanges than can ever succeed.
Phenomenon? Yes. Sure thing? No.
Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at