How can Apple be worth more than Dell?

Comment from Dell executive in 2004, regarding the iPod:
Peter Burrows

I'm still digesting the news that Apple's market cap has exceeded Dell's. Given that Dell was for darn near twenty years the PC company doing all the exceeding from a stock market perspective, this is clearly an occasion worth thinking about (for that matter, it's also pretty shocking that HP now trades at a higher P/E ratio than almighty IBM, but I'll think on that over at the Tech Beat blog some time).

So what does Apple's market cap ascension mean?

As I listened to the Apple call with Wall Street analysts the other day, I kept thinking it comes down to one thing: runway. For me, that's the metaphor that best describes the difference between the firms. Apple is roaring down its runway at a blazing clip, yet it's got miles ahead of it to grow just by pursuing its current plan and exploiting its current capabilities. But Dell, which has been the poster child for this kind of analysis since George Bush Sr. was prez, is suddenly looking like it's running out of room.

Now, I realize Dell is nearly four times Apple's size--and size is a major determinant of market cap. But if you don't have big honking growth markets waiting to be harvested, size can be a heavy anchor indeed. The math is simple. To deliver 15% growth in the upcoming year, $55 billion-a-year Dell has to find $8.25 billion in extra sales. But Apple, at $13.9 billion in overall sales, would have to find just $2 billion.

Size is a burden in other ways as well. As they grow, every company in the history of companies has at some point found it impossible to find enough new markets to keep their runway extending out ahead of them. Jim Mackey, director of development at The Woodside Institute, has done research showing that no big products company has ever grown past $40 billion without suffering a big, nasty slowdown. That seems to be hitting Dell in some regards. Sure, Dell is doing great in printers. But its efforts to take on Cisco in networking, IBM and HP in blades and higher-end servers, and yes, Apple in MP3 players, haven't followed suit. And heck, Cisco is a behemoth that is attacking every adjacent market it can find, and doing a pretty great job of it--and even it can't grow enough to convince its investors that its still a growth stock.

Part of the problem is that when you've got to find such huge gobs of extra sales, it's hard to throw a lot of resources at any brand new thing--because odds are nearly nil that it will be big enough to move the revenue needle much. I'll never forget talking to one high-ranking Dell executive a couple of years ago. The iPod was just starting to take off, and the media infatuation with the story was picking up. After I'd asked my third or fourth question about how the Dell DJ stacked up to the iPod, the excecutive got visibly frustrated and went on a rant about how silly it is that reporters are consumed with a company that is just a nit compared to Dell. As for the iPod, he thought all the hoopla was ridiculous, given that the entire MP3 player market was projected to be just $1 billion or so that year. "It's a fine product, but why would we want to focus [much energy] on that little stuff. It's like being the being the King of MousePads!"

That may be rational thinking if your job is to find $15 billion in extra sales each year. But that same rationaliy means Dell is unlikely to ever pioneer a goldmine like the iPod--which analysts think could bring in $10 billion in 2006! That's a mongo number, no matter who you are. And oh by the way, its helped Apple open up a huge lead over Dell in terms of profitability as well, as Om Malik pointed out in a great post the other day. And profits, at the end of the day, is what investors want.

So what about Apple's growth prospects? Clearly, it's got more potential runways ahead of it than all of us bloggers can count, almost. There's talk of some kind of Mobile Me device, likely an iPhone of some sort. The company could clearly do a media center for the living room, or even a full-blown iTheater-style gizmo for you well-heeled movie lovers out there. And who knows what else.

Then there's the PC biz itself. Suddenly, Apple seems to have bumped Dell out of its traditional role as "company-most-likely-to-gain-boatloads-of-share." OK, no one is talking about Apple zooming from its current 3.3% of the world market to double digits anytime soon. But every point of the $250 billion PC industry is worth $2.5 billion. So if Apple gains a point of market share this year--not a pipe dream by any means, especially given the Intel transition--Jobs & Co. will have already found the fuel for that 15% revenue growth year. And that's without any iPod sales growth.

I'm not saying Apple's shares aren't overheated. They may well be. But while Apple's smallness was formerly a life-threatening problem, it suddenly seems like a big advantage. I guess that's just how the math works these days, when Steve Jobs' reality distortion field seems to have morphed into something else: reality.

Before it's here, it's on the Bloomberg Terminal.