Thursday, July 30, 2009

Apple's Market Capitalization

I was thinking about Apple's market cap earlier today. I know the company has entered or is near entry into the list of top 10 publicly-traded enterprises in the US when measured by market capitalization. I did a Google search to find a quick list based on today's share prices. Instead I came across Philip Elmer-DeWitt's recent column discussing Apple's market cap is now greater than the market caps of HP and Dell combined. It's one of the few columns he's written lately (published yesterday) that I've missed.

The Dell story has become a tragic one. To prop up earnings per share, the company has exhausted almost $28 billion in cash to reduce the number of shares outstanding. The company has used used more hard cash buying back shares than the company itself is now worth.

Apple's market capitalization at about $145 billion places the company in the thin air space among American publicly traded enterprises. Apple is one of the great shareholder success stories of this decade. Long-term shareholders have been enriched with an exponential return on their investment by buying and holding the company's stock.

Having reached the top tier of publicly-traded companies when measured by market cap and closing in on the market cap of Microsoft (currently about $212 billion), it's reasonable to wonder: How much higher can the share price rise?

Apple trades at a price to earnings multiple of about 28.5 times the trailing twelve months of earnings. As an AAPL investor I expect the share price to double from today's closing price of about $163 within the next three years.

Among the reasons for my optimism are the following:

I expect Mac unit sales to continue to rise (albeit at a slower pace of growth than what was realized immediately following the Intel transition).

I expect iPhone units sales to continue rising at a torrid pace over the next twenty four months.

I expect the much-rumored Apple tablet to establish not only a new product class, but to further erode the underpinnings of the PC market and assist in accelerating the developer migration to Mac OS X.

I expect the market itself to enter a bull market phase in the coming year, closing the space between Apple's current p/e and the market average p/e of large cap and medium cap firms.

Interest rates will be on the rise, increasing the return on Apple's holding of more than $30 billion in cash and equivalents. Remember, the company has no debt and is generating cash at a far greater rate than the p/e suggests due to the subscription method of accounting on the iPhone and other factors including the popularity of iTunes gift cards. Pre-paid gift cards are essentially interest free loans to Apple for the purchase of products at a later date. In a way, Apple has created its own form of currency through the iTunes franchise

I won't delve into the numbers right now, but here are my anticipated milestones for the Mac and iPhone maker:

Within 12 months surpassing Microsoft's market cap

Doubling GAAP eps within 30 months (yes, that's an aggressive call)

Reaching the equivalent of $300 per share within 36 months

That's it for tonight's prognostications.


  1. Great blog, DT. Thanks for doing this.

    I will just repeat the one quibble I make on AFB as Macorange, and will continue to make until others take up the cause:

    All of us, when citing the AAPL pe, should cite both a GAAP and non-GAAP number, and when we are doing comparisons we should focus on the non-GAAP number. Now that the non-GAAP earnings are more than 50% greater than GAAP, using the GAAP PE is grossly distortive of AAPL's true value relative to the industry and the market.

    So we should all say something like "while AAPL's GAAP pe is 28, AAPL's pe including all iPhone earnings is around 20, which is [pick your favorite comparison: historically low for AAPL, lower than the industry, etc].

    The way we get to 300 in less than 36 months is for the market to fully account for all iPhone earnings.

  2. I understand your point. I tend not to emphasize multiples based on non-GAAP numbers because it might only feed the desire of commentators to focus solely on the iPhone's recent success. The non-GAAP performance will gradually find its way to the reported GAAP numbers. The GAAP numbers will soften the arc of the iPhone's contributions to near-term revenue and earnings while extending the impact of those contributions to future reporting periods.

    You are correct in suggesting the company's p/e multiples would change dramatically if non-GAAP measured were used in the calculations. All the more reason for AAPL's share price to continue to rise.