Now that Apple has surpassed Microsoft to become the second largest company in the US by market cap, the question arises, will it ever become the biggest?
This position is currently held by Exxon Mobil, with a market cap of $278billion to Apple’s $222billion. It certainly isn’t implausible to imagine this happening within the year, given Apple’s strong growth. Assuming Exxon Mobil stays at the same valuation (unlikely, but bear with me…) Apple’s share price would have to jump from it’s current $244 to just over $305. A big jump? Yes. Unrealistic? Perhaps not. The NASDAQ give the 1 year target estimate as $315.
Taking the massive assumption that a year or two from now, Apple becomes the biggest (or should that be most valuable) company in the US. The next question is, how do they justify that position and won’t the stock be grossly overvalued by this point?
Before we go any further, it should be noted that I’m pretty unqualified to talk on the subject, but just wanted to make my thoughts public.
First of all, some reasons why Apple would be too highly valued:
The Steve Jobs question. Whatever you say about the ability of the rest of Apple’s employees, the truth remains that at the point Jobs is no longer CEO, the stock will tank. This high risk is something investors are going to be aware of and is unusual for a company this large.
Does it really make sense? Apple are a niche computer company who have started making quite expensive phones that some people like. Should they be worth more than Walmart, who have 3,500 stores in the US that are visited by almost half of Americans every week! When something seems too good to be true…
Google. The old rival was often seen to be Microsoft, but it is clear this isn’t the case any more. With Android beginning to outsell iPhone, the immediate smartphone dominance by Apple could be quickly eroded by a cheaper, more open platform that is supported by a wide range of manufacturers and carriers. Can iPhone keep up?
Losing the magic. With stories of App Store rejections and suicides at manufacturing plants, not to mention anti-trust and patents, it seems Apple is having to face up to the reality of being a really large company. People don’t see them as the underdogs anymore and are starting to question the control they have over all their products.
And some reasons it is reasonable for Apple to be the largest company in the US:
iPad. I said before the iPad was announced that I thought it could replace laptops for many people and I stand by that even more having owned one for the last month. The iPad has the potential to replace the PC (in the personal computer, including laptop, sense) in many people’s lives. It will take a while for many to move away from a proper computer to a “big iPhone”, but given time I really believe it will happen. Owning the new mainstream computing platform is valuable.
Owning the whole platform is valuable. Apple figured that one out decades ago. How can HP, Dell or Lenovo differentiate themselves when they are all selling Microsoft Windows, and therefore rely on Microsoft to provide their customers with a good experience? HP are starting to realise this, hence the acquisition of Palm, but have a long way to catch up.
Targeting the high end. Whilst the rest of the market race to the bottom with cheaper and cheaper computers (even if you take netbooks out of the equation) Apple stays firm at the premium end. Apple have a 91% share of computers over $1000 sold to consumers. This means profit margins can stay at a healthy 25%, which is when market share stops being so important.
Amongst my peers at university, more and more are choosing to spend their limited funds on a Mac. Because of this, for many (perhaps the majority) of my university friends, their largest ever purchase has been from Apple. Okay, so they’ll buy houses and cars and it won’t seem so big, but the fact is still impressive and shows how technology spending is not something people are scared of.
To conclude: Apple’s stock price has been incredible to watch over the last few years, yet I’m not sure Apple will ever reach the biggest company milestone and I am nervous about the things that could go wrong along the way. Despite this, I think they are well positioned to benefit from greater consumer use of technology and their stock can continue to grow.
Full disclosure: I hold a small, long-term personal position in AAPL.