Apple and the Fate of Record Market Cap Stocks
Apple’s meteoric rise prompts questions about whether it is becoming overvalued and what its future will be. Some believe it might be the first company to hit $1 trillion. History shows that the fates of other companies that have had record market caps have not been good.
The largest company by market cap 10 years ago was General Electric (NYSE:GE), which then had a market value of $372 billion. It was followed by Microsoft (NASDAQ:MSFT) in second place with a value of $326.6 billion.
In 2002, GE’s stock price reached about $40, on its way down from an all-time high of around $60 in 2000. In the last decade, the price has dropped 50%. Earnings, however, primarily continued to increase through 2006, and revenue through 2008.
Several other problems hit GE that year though. Its earning was on track to grow 17%, but an unforeseen accounting change caused it to only go up 7%. It was also in the third year after the tech bubble collapsed, and the market was reacting to 9/11. It was a year characterized by “slow economic growth — not a double dip, but without a spark — with tough pricing, volatile capital markets, difficult industry cycles, the threat of war and low corporate trust.”
Nevertheless, it was not until 2008 that it really began to fall down the market cap ranks. By the end of that year, it was in 10th place. In the last 52 weeks, GE stock traded in the range of $14.02 to $20.85.
A great difference between Apple and GE is their valuations. Apple has grown at an incredible pace but still has a P/E of 15.5. GE was expensive in 2002, trading at a P/E as high as 29.6, and has remained around the 20 range for the next several years.
Microsoft was the second-largest company in 2002, with a $326.7 billion market cap. By that year its stock had already come down from its tech bubble highs of near $60 in 1999 to 2000 and were trading around $30. Since then its stock has been essentially flat and ten years later trades for $32.85.Though it has remained in the top ten list, its market value never again exceeded $326.7 billion except one quarter in 2007.
Microsoft was also expensive in 2002. Its P/E ranged from 120 to 63 that year and remained in the 30 range for the next several years.
PetroChina (NYSE:PTR) is another company that like Apple grew quickly — its 10-year annual revenue per share growth is 26.5%, though EBITDA is 14.2%, much slower than Apple’s 112.4%. It suddenly became the largest market-cap company in 2007, when its stock price reached $255 per share. Yet it remained inexpensive with a P/E of 15.8. Warren Buffett sold the stock close to the peak.
The 2008 crisis and three straight years of earnings declines brought PetroChina stock back down though. Its P/E ratio is still rather low at 11.95.
Apple stock has leapt from $400 to $600 per share in roughly two months. Nevertheless, it is owned by 24 GuruFocus gurus. Many value investors also like its strong cash flow— reaching $33 billion in 2011 — $30 billion in cash, and low P/E ratio.
One guru who does not own the stock is Donald Yacktman, who questions whether the company can sustain its growth. “I think the problem with most tech businesses is they’re very difficult to predict,” he said on CNBC in March. “Apple has done a wonderful job in creating a very high-margin niche-type company. The question is the sustainability of those profit margins over a long period of time.”
The gross margin he mentions was 44.7% in the first quarter of 2012, up from 38.5% last year. It improved primarily due to lower commodity and other product costs, leverage on their higher revenue and several one-time items, and better-than-expected mix, largely from highest-ever iPhone sales, which may not be sustainable.
As a niche business, Apple sells products that are not necessarily necessities. But demand, at least in the near term, is growing. Gene Munster of Piper Jaffray estimates that Apple will sells 189 million iPhone units in calendar year 2013, revised upward form a priof 162 million estimate. The total projected market for smartphones in 2013 is 804.6 million, and he believes Apple will corner a third of the market by 2015. He expects 86.5 million iPad sales in calendar 2013, revised upward from a previous 75.5 million estimate. That’s 60% of the total table market.
Apple begins selling its new iPad on Friday. A recent survey showed that 22% of companies questioned said they would be purchasing tablets for their employees during the second quarter 2012, the highest level since ChangeWave Research has been doing the survey. A total 84% of companies who plan to buy tablets said they would be purchasing Apple iPads, which is 7 percentage points higher than last quarter.
It also began selling its new 1080p Apple TV which has hardware updated to receive and display 1080p video on an HDTV set.
Apple differs from previous high-market-cap companies for several reasons that indicate it can continue growing. Its valuation is lower at its peak than other high-market-cap companies historically and it is still an inexpensive stock. PetroChina did have a lower valuation at its peak as well, but it was benefiting from high oil prices at the time. Apple also has plenty of room left to sell its products and grow, particularly in China, while other companies such as Microsoft are near market saturation. But one of Apple’s differences from other high-market-cap companies is that it sells products that people want but don’t necessarily need. While people are continuing to get excited about new iterations of Apple’s existing products, it will have to continue introducing irresistible gadgets that drove its growth for the growth to continue over the long term.