By overtaking General Electric Co., Microsoft (Nasdaq:MSFT) did more than reach a strategic milestone -- it provided a glimpse of the high-technology market's future, according to analysts.
"This shows what the expectations are for Internet stocks and for the Internet in general," said Erik Olbeter, director of the advanced telecommunications and information technology program at the Economic Strategy Institute, a think tank on economic policy issues in Washington.
'Microsoft is really valued at this level on the basis of its human capital.'
-- Hans Stoll, Vanderbilt University professor
The stock market jitters of the last few weeks and Microsoft's antitrust woes notwithstanding, economists believe companies whose business revolves around the Internet will continue to drive the world economy for years to come.
Microsoft's surpassing of century-old manufacturing conglomerate GE (NYSE:GE) in the market-cap race is symbolic of the technology sector's new economic dominance, experts said.
As of the close of markets Monday, Microsoft's share value had risen to $106, putting its market cap at $261.1 billion, as compared with GE's $79.13 per share value and $257.4 billion market cap. (On Tuesday, the gap widened: Microsoft shares rose even higher, surpassing $107 and nudging the company's market cap to $265.1 billion. GE's share price fell about $2 Tuesday to $77, bringing its capitalization down to $250.9 billion.)
Why market cap matters
A company's market capitalization -- the price of a single share multiplied by the number of outstanding shares -- is in an important sense a measure of investor confidence in its long-term outlook, Olbeter said.
In Microsoft's case, the metric reflects not just investor enthusiasm about its business, but also about the technology sector as a whole, he said.
"Look at what's happened to the Nasdaq," he said. "The five biggest tech stocks account for 25 percent of its growth this year -- that's huge."
For Microsoft, as with many other tech companies, a rising market cap is a sign that investors are confident that its book value will continue to sustain strong growth, Olbeter said.
Antitrust case not a factor
Even though the U.S. government and many state attorneys general are probing Microsoft's competitive practices, such lawsuits can take decades to resolve, so most investors aren't being put off by the probes, at least for now, said Tim Sloane, an analyst at Aberdeen Group in Boston.
Indeed, the milestone came the same day that a federal judge dismissed Microsoft's bid to throw out the antitrust case.
The milestone for Microsoft is all the more noteworthy in light of the relative size of GE: Microsoft's employee base is less than one-tenth the size of GE's, and its revenues for the fiscal year ended June 30 were $14.5 billion, less than a sixth of GE's revenues, according to financial statements from the companies.
Microsoft has some 2.4 billion shares outstanding, as compared to about 3.2 billion shares outstanding for GE, according to financial reports. During July's stock market surge, both companies' market caps topped $300 billion.
One economist called the development surprising, given GE's longstanding leadership in numerous markets, from jet engines to consumer electronics to television (it owns NBC).
"GE is just the best-managed and most versatile company in the modern era," but with such diverse businesses, "the question is how long they can keep it up," said Hans Stoll, director of the Financial Markets Research Center at the Owen Graduate School of Management at Vanderbilt University.
Microsoft's milestone is evidence of the increasing value the market places on human capital as opposed to physical capital, Stoll said.
"Microsoft is really valued at this level on the basis of its human capital, the talent they have over there," he said. "It's a sign of the change in the times and the move to a service economy."
Microsoft officials did not immediately return phone calls seeking comment.