You may have seen in recent days that shares in the software giant Microsoft jumped, pushing its market value to an eye-watering $2.53 trillion — pipping Apple, worth a measly $2.47 trillion, for the title of world’s most valuable company.
The proximate cause for the flip was that Apple “only” brought in $83 billion in sales for the three months through September. It was a 29 per cent rise on the year before but $2 billion under what Wall Street had expected.
The real story, however, is that software may simply be the best business on God’s green earth. Microsoft sales for the summer period surged to $45 billion, generating a staggering $17 billion profit. That’s a 37 per cent margin, good for $190 million a day. In profit.
When you get to Microsoft’s size, the law of large numbers is meant to kick in. The bigger you get, the slower you grow. That’s just how it works. Or used to. But software frees companies from the laws of physics.
When the core assets are code rather than, say, factories or stores or oil wells, the cost of adding or serving new customers is in effect zero. It is pure profit. Strap that to the billions of people on the web and growth is virtually limitless.
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David Sacks, founder of Craft Ventures, a firm specialising in software-as-a-service companies, said on his All-In podcast that “we’re seeing valuations go to multiples that we’ve never seen before”. Valuations of 100 times annual recurring revenue for start-ups are “the new norm”.
So investors may value a company with just $1 million in sales at $100 million.
Of course, many of these upstarts will crash and burn. But nothing scales like software, and so the scrum is on. Software is eating the world, haven’t you heard?
