AppleInsider Staff
Brian White with Topeka Capital Markets said in a note to investors Monday that he has heard analysts and market pundits over the last several weeks discuss the point of a $500 billion market cap as a barrier to further price upside at companies in the past. Some on Wall Street have theorized the $500 billion market cap threshold is a "barrier" for stocks.
These people are concerned that a similar scenario could happen with Apple, preventing the company from pushing much further past the $500 billion mark. As of Monday morning, Apple's market cap was at about $545 billion.
The line of thinking among some on Wall Street is that companies that exceed $500 billion in market capitalization have trouble growing much beyond that point. But White believes Apple's market cap potential in trillions of dollars, not billions.
"We went back and analyzed five U.S.-based companies that at one time enjoyed market capitalizations of (about) $500 billion or more, but found little similarities with Apple," he wrote.
Those five companies were Cisco Systems, Exxon-Mobile, General Electric, Intel, and Microsoft. With the exception of Exxon, these companies had rich price-to-earnings ratios when they crossed the $500 billion mark, and the tech companies had what White called "monopoly-like market share positions."
But Apple does not have a stranglehold on most markets where it competes. Instead, there is plenty of room for growth in the booming smartphone market.
"Microsoft held over 90% market share for PC operating systems at the peak cap, while Cisco had over 70% share in the networking market and Intel had over 80% of the PC processor market," White said. "By comparison, IDC estimates that Apple held just 4.7% of the PC market in (the first quarter of 2012) and 8.8% share in the mobile phone market."
Apple's iPad does dominate in the tablet market, with an estimated 68 percent share of shipments in the first quarter of 2012, but White noted that it's a market category that Apple invented.
White expects that in calendar year 2012, Apple is poised to generate the highest profits of any publicly traded company ever. Compared to the "big three" technology companies that have exceeded a $500 billion market cap, he believes Apple's net income will over over six times higher on an individual basis to when those companies were at their respective peaks.
In addition to its relatively low market share, Apple stock is currently trading at just 8.4 times White's estimates for calendar year 2013 earnings per share, excluding cash. In comparison, the three technology companies that have crossed the $500 billion threshold — Microsoft, Intel and Cisco — had price-to-earnings ratios of over 80 times.
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"Microsoft held over 90% market share for PC operating systems at the peak cap, while Cisco had over 70% share in the networking market and Intel had over 80% of the PC processor market," White said. "By comparison, IDC estimates that Apple held just 4.7% of the PC market in (the first quarter of 2012) and 8.8% share in the mobile phone market."
Apple's iPad does dominate in the tablet market, with an estimated 68 percent share of shipments in the first quarter of 2012, but White noted that it's a market category that Apple invented.
Apple's phone business is currently the biggest single source of profits. In my opinion, the market has a huge growth potential as emerging markets shift to smartphones and Apple continues to market older models (which have a low marginal cost) to these new markets. Apple has solid products at various price points in the phone game. Not only are they well positioned to capture sales in new markets, even established markets are experiencing double-digit rates of conversion to smartphones, and in these markets, Apple can sell huge numbers of its latest and greatest iterations at early-adopter prices.
With tablets, things are much less clear. Apple currently dominates, and so, only a growth in the market itself could result in greatly increased sales for Apple. Will the tablet market grow as fast as smartphone market? Will margins remain attractive, like they have in the phone biz? Time will tell.
The PC market is not going to grow nearly as fast as the smartphone or the tablet markets. It is not a prime source of profits anymore. Apple can concentrate on niches within the overall market, but overall, there's less potential.
I think we're years yet away from the time when we're not blown away by Apple's growth and earnings.
Considering how small Computers have become, as a percentage of Apple's Revenue and Profits, it is indeed strange that Apple still insists on high margins in this space. In Apple's own reckoning, the PC market is a dying market, and the future is in tablets. Then why don't they lower their margins and make a play for increased marketshare?
Today, the barrier to developing iPhone and iPad software is significantly higher than the barrier to develop Android Software. You absolutely need a Mac to build iOS software. And with Apple's prices, this is a stiff entry barrier indeed.
Even if Apple lowers margins on Macs to 10%, it will not hurt their bottom line in a significant way. And in all likelihood, the resulting increase in sales will more than make up for the lower margins.
[quote name="JerrySwitched26" url="/t/150772/apples-2012-profits-forecast-to-be-highest-of-any-public-company-ever#post_2129487"] Apple's phone business is currently the biggest single source of profits. In my opinion, the market has a huge growth potential as emerging markets shift to smartphones and Apple continues to market older models (which have a low marginal cost) to these new markets. Apple has solid products at various price points in the phone game. Not only are they well positioned to capture sales in new markets, even established markets are experiencing double-digit rates of conversion to smartphones, and in these markets, Apple can sell huge numbers of its latest and greatest iterations at early-adopter prices. With tablets, things are much less clear. Apple currently dominates, and so, only a growth in the market itself could result in greatly increased sales for Apple. Will the tablet market grow as fast as smartphone market? Will margins remain attractive, like they have in the phone biz? Time will tell. The PC market is not going to grow nearly as fast as the smartphone or the tablet markets. It is not a prime source of profits anymore. Apple can concentrate on niches within the overall market, but overall, there's less potential. [/quote] The tablet market has a long way to go before growth slows to low double digits. I can see the market supporting well over a 500 million a year sales level, with Apple having a very large portion of that, possibly even a majority, particularly if they do come out with a smaller less expensive 7.85" model. And don't forget that while Windows PC growth is slowing and even shrinking at times, Apple's Mac growth is still solid. And we don't know where else they may be going. With the agreement with at least 9 major auto makers to put a Siri button on the steering wheel (a major, and shocking development according to friends in the auto business), Apple is getting in front of that business. How far it will go is anyone's guess right now, but we can be sure that Apple has plans for this that go further than it may now seem. Then there is what seems to be the age old question of an actual Tv of some kind. Estimates are that if Apple gets just 2% of the Tv market, that could be $11 billion that year for them. If their sets cost the $2,000 average predicted, it could be more than 2%, as $2,000 is just the average price for a large screen advanced model, which go over $4,000.
Off topic: I think it'll be the same people that will claim "Steve would have never done this" for anything Apple does that don't like (even if it happened during his watch), and that any positive changes that Apple makes since Steve's passing will be the result, not of Tim Cook's leadership of other people at Apple, but actions Steve put in place before he stepped down as CEO. Even if Apple becomes the first trillion dollar publicly traded company it'll just a be a fluke and/or have nothing to do with the current efforts from Apple. Can Apple ever win? [quote name="melgross" url="/t/150772/apples-2012-profits-forecast-to-be-highest-of-any-public-company-ever#post_2129499"]And don't forget that while Windows PC growth is slowing and even shrinking at times, Apple's Mac growth is still solid.[/quote] I am expecting to see a new Mac campaign this year. ML launching less than a year after Lion, almost all Macs updated this summer, amazing changes to the MBP that can't be met by other vendors, and Win8 being a complete logistical mess for users tell me it's perfect storm to increase Mac growth even faster.