The stock market thinks Microsoft has just under 4 years left

(I posted this basic analysis at http://news.ycombinator.com/item?id=1417156, which was a discussion of this Newsweek article, and then decided that it was interesting enough to call out for additional attention.)

Those of us who pay attention to finance know that the market tends to be more accurate than any individual person. So sometimes it is worth analyzing what the market is saying about different companies.

If you look at the stock market, it clearly saying that Microsoft's future doesn't look as bright as Google's or Apple's. That's why Microsoft is worth a P/E of about 13, while Google is worth one of 22 and Apple is worth one of 21.

The market projection gets substantially more stark when you subtract current book value to find how much the market values future revenue. (Book value is what all of the company assets would be worth if it was broken up and sold today. For Microsoft this is largely made up of their cash reserve.) Microsoft's market cap is 221 B, their book value is 46 B, and therefore 175 B of their market cap is projected future earnings. Their current profit is 46.28 B/year, and that works out to the market valuing them at their current earnings stream projected over a bit under 4 years.

For Google the equivalent exercise says a market cap of 154 B, and book value of 38 B so 116 B of market cap is projected future earnings. Their current profit is 14.81 B/year, which translates into the market valuing them at their current earnings stream projected over a bit over a decade. (10.4 years.)

For Apple the equivalent exercise says a market cap of 225 B, a book value of 39.4 B for 185.6 B of market cap due to projected future earnings. Their current profit is 17.22 B/year, which translates into their current earnings stream projected over a decade. (10.8 years.)

So the projection that Microsoft is walking over a cliff in a few years while both Google and Apple have a decent future. The market is perfectly aware that a lot changes in 10 years, and so they heavily discount any projections out that far. But the market is more likely to be correct for near events.

Now admittedly I've never liked Microsoft. But this isn't just claimed by some random haters on the Internet. This is the consensus of the stock market, which is based on a lot of informed people putting their money where their mouths are. This is worth thinking about.

(I took all figures for this from http://finance.yahoo.com/q/ks?s=msft, http://finance.yahoo.com/q/ks?s=goog and http://finance.yahoo.com/q/ks?s=aapl. I got book value by multiplying book value / share times shares outstanding.)