Apple is a fine company that crafts highly valued products and sells them at a premium price to very loyal customers. The company’s gifted leadership spent more than a decade cultivating a culture and corporate vision that made this wonderful growth possible. That being said, AAPL is and has been in a bubble for a while now and the outrageous size of that bubble jeopardizes the performance of the entire market.
This past week AAPL added the value of the market cap of Hewlett-Packard –the number one producer of personal computers by revenue. Each day the firm added $5 to $6 billion to their total market value. AAPL now has a greater market cap than the entire semi-conductor sector and the entire retail sector. Does that make sense? Does that seem sustainable?
The media and sell-side analysts are breathlessly hyping the stock $600, $700, $1,000 per share! $1,000 per share would make AAPL worth about $1 trillion dollars. Let’s put $1 trillion into perspective:
This is $100 million of $100 bills in a single pallet:
Here we have a $1 billion dollars of $100 bills –by the way AAPL is adding several billions on daily:
Now here’s what analysts think AAPL should be worth… $1 Trillion:
Presently the firm is valued at $549 billion, so the sum total of AAPL stock is more than half this giant double stacked square of $100 million cubes.
Much of the recent manic euphoria surrounding AAPL is the result of the firm crossing the $500 billion mark. Few companies have achieved that major milestone, but the ones that have didn’t retain the value for very long. Take a look at Cisco, Microsoft, General Electric and ExxonMobil, all crossed the $500 billion mark and subsequently plunged. In the year 2000 Cisco entered the $500 billion club and promptly lost 20% of its value in a month – by the end of 2000 it plunged to $221 billion. A better analog for AAPL is probably Microsoft – they peaked at $600 billion in January 2000 and fell back to $221 billion by the end of the year. Achieving the $500 billion mark is very costly for a firm and it usually occurs on the back of a parabolic increase in stock value, much like AAPL has experienced over the first quarter of 2012:
Nearly every day the financial media is peppered with the excited opinions of analysts and pundits proclaiming that Apple will be this $1 trillion goliath. With each interview these prognosticators are bidding a higher and higher price target without much critical thought into how a large firm even achieves such a goal. The excited parabolic frenzy of the past week reminds me of the gold/silver excitement of spring 2011. Every day analysts proclaimed the precious metals had nowhere to go but up and that fiat money is dead. Every day the excitement grew and grew and great numbers of fools piled on with real and margined money until one day they simply ran out of buyers. Silver subsequently plunged in a chaotic and disruptive manner that caused great disturbances throughout all asset markets.
So the big question is, can AAPL go higher? Yes sure it can. Will it be a trillion dollar firm in the next 12-24 months? That’s very doubtful. Every asset has a tendency to regress to the mean and AAPL too will return to its mean growth rate which should be closer to $428 a share (27% lower than today’s price.)
One day there will be a trillion dollar corporation –if only because inflation makes it so—and it’s possible that Apple will be the first. It’s also quite possible they won’t. Hop in the time machine to 2003 and you'll see a whole lot of hype about potential trillion dollar companies. Is this time different? The answer is no.