Google's market cap is now 17% higher than MSFT, up from 3% at the beginning of the year.  If this keeps up, GOOG should be 25 or 30% by the end of the year.  I dont think that MSFT can continue to be a threat in mobile unless they get their act together; assuming that future performance will be more of the same; expect MSFT to cut back on smartphone advertising/sales within only a couple of years. 

Assumptions:

I assume that the stock market is at least somewhat rational, and that stock prices reflect future expectations of cash flow.  I also assume that a growing company will eventually be able to muscle out a smaller, weaker one

A dangerous assumption that so many people keep making, despite a long history of cautionary tales.

Google is a little overvalued right now. Not Netflix or Amazon overvalued, just a little. Of course, this fact has little to zero bearing on Google or Microsoft's fortunes in mobile, as both companies have an abundance of funding available for whatever ambitions they might harbour. The only way this threatens Microsoft's mobile ambitions is if the company starts making myopic decisions trying to move the stock price instead of sound decisions to build their business.

It's still anybody's guess which company actually makes more money in mobile. Though Microsoft's patent well will eventually run dry, mobile advertising has proven to not be quite as lucrative as hoped. It's not clear whether that's a limitation of the medium (people may not be very receptive to ads when all they're trying to do is find the address for that restaurant) or just inertia in ad spending (proportion of user time spent in mobile is ten times the proportion of ad spend in mobile. That compares to print, where proportion of spend is twice as high as usage).

Okay, I don't think your assumptions are entirely wrong, but I would like to suggest, in the interest of fairness, that you keep in mind what happened with Zynga, and even what's happening with Facebook.  Stock markets are very much in the near-term, focusing on getting as much profit as possible in as short a time as possible.  They sometimes miss the mark and end up losing big time as many of these relatively new companies make a lot of money in a short time but then a year or two later they fall flat on their face and end up doing massive layoffs and losing most of their customer base. 

You have to keep in mind that corporate management's most important job is maintaining long-term competitiveness and viability, and the shareholder's main concern is short-term profits and excessive growth.  Those two goals are not always hand-in-hand.  The former leads to bubbles that get too big and they burst, and then the company fumbles and has to fall back on long-term planning and what it does best just to stay afloat.

NOt really