Google and Microsoft are the second-most and third-most valuable public companies in the world right now, behind Apple who holds the number one position. Both the companies are very innovative and leaders in their respective markets. Then, why do markets value Google more than Microsoft? You would get that answer when you will look at our analysis of their TTM (trailing twelve months) revenues for the past 25 quarters.
For those who are not familiar with TTM revenues, here is a brief explanation. Google fiscal year (FY) ends in December. Microsoft fiscal year (FY) ends in June. To make a like-to-like comparison of their revenues and profits, we looked at TTM revenues instead of FY revenues. For example, for Q1’17 (quarter ending in March 2017), we considered TTM revenues of both the companies during Q1’17. This means we considered their total revenues during the twelve months period from April 2016 to March 2017. Similarly, for Q4’16 (quarter ending in December 2016), we considered TTM revenues that represent the twelve-month period from January 2016 to December 2016.
Before we present our analysis, here is a brief description of how the two companies generate revenues.
Google vs Microsoft - How do they generate revenues?
Google is a leader in the Internet industry, one of the most recognized brands in the world, and is currently the second most valuable public company in the world. Google is a business segment of Alphabet. Many people may not have heard about Alphabet but most online users know Google. On August 10, 2015, Google founders announced the creation of Alphabet to contain the companies that are far afield of their main Internet products. All those businesses are referred to as ‘Other Bets’.
Alphabet comprises of two business segments: Google Segment and Other Bets. During FY 2016 (12-months ending December 2016), Google Segment contributed over 99% to the Alphabet total revenues and Other Bets contributed less than 1%. So, Alphabet generates most of its revenues and profits from Google Segment.
Google generates revenue primarily by selling online advertising over its sites and its network member sites. Google Network is the network of third parties that use Google advertising programs to deliver relevant ads to their sites. During FY 2016, of the total $90 billion of revenues, Google segment generated 89% of its revenues from online advertising and 11% of other sources. Other sources consist of revenues from: Apps, in-app purchases, and digital content in the Google Play store; Hardware; Licensing-related revenue; and Service fees received for Google Cloud offerings. For more details about Google business model, please see 'How Google Makes Money?'
Microsoft is the leader in the Software industry by revenues and profits. Microsoft makes money by licensing and supporting a wide range of software products, by offering an array of consulting services and cloud-based services, by selling devices that integrate with its cloud-based services, and by delivering relevant online advertising to a global audience. During FY 2016 (12-months ending June 2016), of the total $85 billion of revenues, Microsoft generated 28% of its revenues from Microsoft Office System, 22% from Server products and tools, 11% from Xbox, 9% from Windows PC operating system, 7% from Advertising, 7% from Consulting and support services, 5% from Surface devices, 4% from Phone business, and remaining 7% from other sources. For more details about Microsoft business model, please see 'How Microsoft Makes Money?'
Google vs Microsoft TTM Revenues from 2011 to 2017
During the first quarter of 2011, Google reported TTM revenues of $31.1 billion. At that time, Microsoft TTM revenues were $68.6 billion. So, Microsoft was more than double in size of that of Google during the first quarter of 2011.
It took Google less than six years to close this big gap in revenues. During the third quarter of 2016, Google reported TTM revenues of $85.5 billion, whereas Microsoft reported TTM revenues of $85.4 billion. During the last two quarters, Google has increased its lead over Microsoft even further.
During the first quarter of 2017, Google reported TTM revenues of $94.8 billion, whereas Microsoft reported TTM revenues of $87.2 billion.
The diagram below shows the rise of Google and how it took over Microsoft in revenues with a consistent growth. Microsoft reached its peak revenues during the first quarter of 2015 and has not been able to attain those levels during the past eight quarters. But, Google has just kept on growing so far. No decline in revenues is expected in future as well, given their growth initiatives. We think that's why markets love Google more than Microsoft.
Google vs Microsoft TTM Net Income from 2011 to 2017
Google has not only delivered a consistent growth in revenues but also in profits as well.
During the first quarter of 2011, Google reported TTM net income of $8.3 billion. At that time, Microsoft TTM revenues were $21.8 billion. So, Microsoft net profits were more than double of that of Google during 2011 first quarter.
It took Google less than five years to close this gap in net income. During the second quarter of 2015, Google reported TTM revenues of $14.9 billion, whereas Microsoft reported TTM revenues of $12.2 billion. After that, Google has delivered a consistent growth in net income, whereas Microsoft has not been so consistent.
During the first quarter of 2017, Google reported TTM revenues of $20.7 billion, whereas Microsoft reported TTM revenues of $17.8 billion. Google has maintained its lead over Microsoft in net profit for the past seven quarters.
The diagram below shows the TTM net income of Google and Microsoft during the past 25 quarters. Again, Google has just kept on growing so far in net profit as well. However, profits may come under little pressure in future as their hardware sales from Chromebooks and Pixel smartphones increase.