Microsoft: market share, growth and market value

I've been reading a number of media stories about Apple's market capitalization having shot by Microsoft's recently.  These stories often went on to point out Microsoft's large share of the market and the fact that the companies rate of growth doesn't match the company's early years.  It appears that there is some confusion out there in the media and I'd like to examine what those metrics mean.

Market value or market capitalization

Market value or market capitalization is simply the overall value of the company. It is calculated by multiplying the current share price by the number of shares outstanding. This metric is only indirectly related to the firms actual revenues, go-to-market strategies, share of the market and other views of company performance. This metric is based upon the foundation of investors' feeling about the company. A company may have absolutely huge revenues, hold a dominant position in nearly every market in which it competes and still not be properly recognized by investors.

As an aside, I remember when IBM announced a new Series 1 on the same day my employer announced a new PDP-11, a 16-bit minicomputer. Digital Equipment's stock value declined that day even though that machine turned out to be very popular. Investors obviously were enthusiastic about IBM's move and must have decided that DEC's move on the same day wouldn't pan out. They were wrong.

The value of a stock is based on many factors including investor's feeling about the company, feelings about the market segment a company plays in, feelings about the economy, news items such as the appearance of an armed conflict or new disease.

Market share

Market share is a multi-headed beast. It is based upon a comparison of a company's revenues or shipments to all others in the same market. A supplier might have a dominant share of the revenues in a given market while being way down the list when shipments of products are being examined.

Companies having a dominant (greater than 50% share of a consolidated market or twice the share of the next competitor in a fragmented market) share of market reveues are unlikely to experience the same high rates of growth as smaller firms.

A company selling many inexpensive products may have a high share of a market's shipments and a low share of that same market's revenues.

Growth

A company that increased its revenues from $1 B to $1.25 B would have experienced a 25% growth.  A competitor that grew from $1 M to $2.5 M would have experienced a 250% growth. The first company clearly is more successful than the second and yet some will base significant decisions (and media stories) on the rate of growth rather than on the actual level of growth.

Final thoughts

There are many ways to look at markets and individual companies. Each is useful to certain people at certain times and not very useful at all at other times. It's wise to remember that market share of a market's revenue is quite different than the market share of a market's shipments. It's also wise to remember that market capitalization or market value is related to, but different than market share.