It’s pure coincidence that Microsoft Corporation (NASDAQ:MSFT) announced its new CEO (Satya Nadella) on the same day Facebook Inc (NASDAQ:FB) celebrated its 10th birthday. Both technology giants were founded by Harvard dropouts. But the timing raised an intriguing question: which of the two tech juggernauts are going to be around in the next 30 or 40 years?
Market favors Facebook over Microsoft
Of course, Facebook Inc (NASDAQ:FB) seems to be the obvious answer. The social networking giant has more than 1.23 billion users worldwide. Of them, about 750 million are daily active users. And Facebook has built a strong presence on mobile devices, which represent the future of technology, says John Cassidy of The New Yorker. Even the stock market has faith that the Menlo Park-based company has a brighter future. Facebook is trading at a P/E ratio of more than 95, compared to just 13.42 of Microsoft Corporation (NASDAQ:MSFT). Over the past 12 months, Microsoft shares have gained 30%, but Facebook has surged 111% in the same period.
Warren Buffett: If You Own A Good Business, Keep It
Buying private businesses is easier than acquiring public firms, and investors should avoid selling good investments at all costs, according to the Oracle of Omaha, Warren Buffett. Q2 2020 hedge fund letters, conferences and more In an interview with CNBC in March 2013, Buffett was asked if he was looking at any businesses, in particular, Read More
Even today, Microsoft Corporation (NASDAQ:MSFT) is seen as a desktop company. Its Windows/Office products run on more than 85% of desktops around the world. The 39-year old company has made several attempts to expand beyond Windows/Office, but failed for the most part. Steve Ballmer, who took over as its chief executive in 2000, was widely seen as a businessman who knew little about where technology was headed. By replacing him with Satya Nadella, the company has tacitly admitted that critics had a solid point.
Microsoft vs. Facebook: the tech landscape
However, analyzing which company is going to last longer isn’t quite so easy. Microsoft Corporation (NASDAQ:MSFT) will turn forty next year. Facebook Inc (NASDAQ:FB) will reach that milestone in 2044. Which company will still be there, probably ruling its respective market? Economist Brian Arthur of The Sante Fe Institute offered great insights about the technology industry more than a decade ago. The tech industry is different from most other businesses. In other businesses, a company can build franchises that don’t occupy the entire market, but are pretty difficult to dislodge.
But the tech industry is like a lottery of innovation, and the winners enjoy the prize of temporary monopoly. Google Inc become Google because it won the search engine lottery. Facebook Inc (NASDAQ:FB) became Facebook because it won the social networking lottery. And Microsoft Corporation (NASDAQ:MSFT) become Microsoft because it won the operating system lottery. Here, the market leader is rarely dislodged by another company that comes with a cheaper or improved version of the similar product. Instead, they can be entirely displaced by another innovative technology that takes the entire market in a new direction, says Cassidy. You want proof? Eastman Kodak went bankrupt when digital cameras took the market in a new direction.
So, you have to look at how vulnerable a company is to disruptive technologies. For more than a decade, Microsoft Corporation (NASDAQ:MSFT) looked like a juggernaut, but recently the smartphone and tablet revolution has shifted a large part of the technology industry away from desktops. And thanks to cloud computing, Google Inc and others have started offering web-based products that can eliminate the need for the MS-Office suite.
Microsoft less vulnerable to disruptive technologies
Despite all the threats and changing market scenarios, Microsoft Corporation (NASDAQ:MSFT)’s revenues and profits have grown more than 200% since 2000. During the latest quarters, the company’s business continued to grow despite falling PC sales. That was mainly due to new products like the Xbox One and strong relationships with its enterprise clients. In Q2, 2014, the company earned a profit of $6.5 billion as its enterprise business showed solid growth all around. Over the past decade, the software giant has demonstrated that its business and customer base is less vulnerable to disruptive technologies.
On the other hand, Facebook Inc (NASDAQ:FB) generates revenues by monetizing user data, especially by selling targeted ads. Wall Street was initially concerned over the company’s ability to generate money from mobile. But Facebook has proved it, as mobile ads accounted for 53% of the company’s total advertising revenue. As a result, the stock’s valuation surpassed $150 billion. But its revenue in 2013 was less than $8 billion or about 10% of what Microsoft Corporation (NASDAQ:MSFT) generated in the same period.
A disturbing sign for Facebook
Facebook Inc (NASDAQ:FB) is growing rapidly. But that’s not unique to the social networking company because almost every successful technology company has done so at some point. So, let’s look at its technology platform. Users hardly switch social networking sites because their friends are already on Facebook. The company keeps innovating. It has launched Graph Search, and recently unveiled the Paper app. But other developments haven’t been particularly good for Mark Zuckerberg’s company. Facebook’s chief financial officer recently confirmed that many young users, especially teens, are quitting the site to move to other “cooler” apps.
It’s no myth that young people drive technology trends. So, youngsters quitting Facebook Inc (NASDAQ:FB) is a disturbing sign. They seem to be headed to a newer, cooler destination. So, it will be interesting to see which company outlast the other. Meanwhile, watch out for the next Bill Gates or Mark Zuckerberg, who might take the market in yet another entirely unanticipated and exciting direction.