Apple Now King Of The Mountain

By Stephen D. Simpson, CFA | May 28, 2010 AAA

Yesterday marked an event that probably no sane person would have predicted 13 years ago - Apple (Nasdaq:AAPL) surpassed Microsoft (Nasdaq:MSFT) and became the company with the highest market capitalization of any tech company in the world. While the margin of superiority is tight enough that leadership could change hands a few more times, it is probable that Apple is going to enjoy a stretch of time as the most valuable tech company in the world. (For a quick refresher, check out Market Capitalization Defined.)

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How Did This Happen?
If you go back to 1997 when Steve Jobs rejoined the firm, Apple was nearly bankrupt and WinTel ruled the technology world. Although the PowerBook proved popular, the Macintosh was floundering and the company wasted a great deal of time and money on the Newton platform and a failed alliance with IBM (NYSE:IBM) and Motorola. Enter, or rather re-enter, Steve Jobs. (To read more about Steve Jobs' influence, see What Would Steve Jobs Do? and Hype It Like Steve Jobs.)

In short order, Apple killed the Newton, reached a deal with Microsoft wherein Microsoft actually bought Apple stock, invested considerable resources into multimedia development, opened the Apple retail store, and made moves that would ultimately lead toward the iPod and iPhone. With the launch of better Macintoshes and laptops, followed by the company's entry into portable media and mobile communications, Apple completed a near-total transformation from also-ran to thought leader. (For more, see Turnaround Stocks: U-Turn To High Returns.)

Personally, I have a slightly stranger theory for Apple's rise. Namely, I think Apple did the best job of making over two decades of popular science fiction come true. The notion of integrating computers, mobile communications and entertainment into small, portable consumer devices has been around for decades. But Apple actually did it.

Who's on Deck?
With Apple now the top kick, the question moves to who might be the next company to aim for that coveted spot.

Could Microsoft reclaim its top spot? I am skeptical. To me, it seems like Microsoft has gone almost nowhere with its mobile platform efforts. Worse still, I think Microsoft is hobbled by having so many projects under one roof - including platforms and divisions that are low-growth and encumbered by an eternal drive for backwards compatibility.

Google (Nasdaq:GOOG) might be the next logical candidate, but the company is pretty far behind in terms of market cap. Google is certainly not sleeping on the mobile communications theme, and the company has proved that it has the chops for both innovation and market competition. With so many different irons in the fire, it is difficult to imagine what Google circa 2020 will look like, but I would bet the company will be a major player in multiple consumer-oriented markets.

IBM is about as far behind Apple as Google, but I would argue that IBM is heading in a much different direction. IBM has a solid position in infrastructure-management and middleware software, and a very large technology service business. IBM has a logical collection of business and good prospects for the future, but its focus on business versus consumer will probably keep a lid on its chances of being the top company in tech.

Baidu (Nasdaq:BIDU) would be another logical candidate to discuss. Baidu is the dominant paid search provider in China, the country with the largest population. That leadership should produce ample cash that the company can put toward developing additional technologies, products and markets (much like Google has done). I do not dismiss Baidu's opportunity to leverage e-commerce in China into a massive enterprise, but these future products and services are mostly just speculation at this point.

I will also suggest that Hewlett-Packard (NYSE:HPQ) has a fighting chance in this game. The acquisition of Palm certainly gives the company a boost in mobile technology efforts. Unfortunately for Hewlett-Packard, this company's legacy is in hardware and I do not see hardware being the driver of tech leadership in the coming years. If Hewlett-Packard can do more to bulk up its services business and add some juice to its consumer-oriented software technologies, I would not count this company out of the race.

Heavy Is the Head That Wears the Crown
Apart from the ego that goes with the top spot, being the largest tech company ultimately means little in the scheme of things. Apple will need to continue to innovate and anticipate consumer needs to maintain its growth and its leadership. Perhaps Apple really does see the future a little more clearly than the competition and can stay on top for a long time to come. Then again, there very well may be the next revolutionary idea already sitting on an R&D bench at a rival firm. Stay tuned, because however the battle goes, it will be fun to watch. (For related reading, check out Catching Comeback Stocks)

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