Why Apple (AAPL) Stock Won't Reach A $1 Trillion Market Cap By 2014

OPINION

 @redletterdave on April 03 2012 10:47 AM
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On Tuesday, Piper Jaffray analyst Gene Munster described the way in which Apple (AAPL) could accomplish a market capitalization of $1 trillion by 2014. But just how realistic is this estimate?

Market cap is calculated by multiplying the price per share times the number of shares. The largest market cap ever was $619 billion, which was recorded by Microsoft in 1999. Nonetheless, Munster believes Apple could easily round up more than $400 billion in market cap over the next two years.

Munster, who also raised his iPhone estimate in Q2 to 33 million units and set a new 12-month target price at $910 per share, believes that Apple will get about $200 billion from the money that's already pouring into tech stocks, and another $200 billion from the drain on the company's Silicon Valley competitors, such as RIM, Nokia, Sony, Microsoft, and HP, which make up about $1 trillion in market cap combined.

First, we believe dollars invested in US technology companies will increase ~5% y/y on average for the next three years (CY12-CY14), Munster said. By comparison, dollars invested in US tech companies were up 9% y/y in 2011. Therefore, the tech sector will add ~$390 billion in market cap through 2014. We assume Apple could capture half of this market cap (from 85% in the 4 years prior).

Second, the companies we consider to be the 10 most relevant competitors to Apple (Samsung, HTC, RIMM, NOK, SNE, DELL, HP, MSFT, INTC, GOOG) represent nearly $1 trillion in market cap today. We believe 20% of that value, or ~$200 billion could shift to Apple through 2014. Thus there is potential for Apple to repeat history and add another $400 billion to its market cap. At a $1,000 share price (roughly $1 trillion in market cap) Apple would represent 26% of the total US tech market cap from 17% today.

Surprisingly, Munster believes that Apple's recently-announced dividend will only contribute a relatively small portion of the overall funds.

If we assume that 25% of large cap tech income funds buy AAPL (which we estimate to be about $150 billion), that would add around $40 billion to Apple's market cap or 10% of the total market cap increase needed to get to a $1,000 share price, Munster said. That said, we believe many income funds have already bought shares of AAPL, so the more likely impact is closer to a 5% benefit.

While Munster's estimations are a reach, he's not the only Wall Street analyst who believes Apple can reach a $1 trillion market cap. Ticonderoga's Brian White believes the company could achieve the scale the trillion-dollar cap, which would set the Cupertino, Calif.-based company's new price target at $1,001.

Apple fever is spreading like a wildfire around the world, and we see no end in sight, White said on Monday

White factored in Apple's current growht, its anticipated continued growth, its cash holdings, and a price-to-earnings ratio from 2006-2010.

Our 12-month price target of $1,001.00 for Buy-rated Apple is based on just over 17x our interest expense/income adjusted CY13 pro forma EPS estimate plus net cash per share of $103.66, White said. This equates to a straight P/E of just over 19x our CY13 EPS estimate and is below the mid-20 multiple of 2006-2010. In our view, Apple's valuation does not reflect the growth the Company has been able to deliver in recent years, nor future growth prospects. Between FY04-FY11, Apple grew sales by 44% per annum and increased EPS by 86% per year. Trading at a P/E (ex-cash) of just under 10x our CY13, we believe the stock still has significant upside potential.

While both of these Wall Street analysts predict Apple's continued success, these outlooks are extremely optimistic, and assume that Apple can do no wrong.

It's true: In recent years, Apple has been on a roll. The company introduced its most successful products over the last five years -- the iPhone in 2007 and the iPad in 2010 -- but Apple would need yet another revolutionary device to accomplish a $1 trillion market cap.

The company could easily accomplish its goals if it in fact released an Apple-branded TV, but that product doesn't look like a possibility in 2012. In the meantime, the company will need to keep innovating its products while retaining the qualities that made them insanely great and addictive in the first place.

Apple is currently cruising off products and designs laid down by late co-founder Steve Jobs and head designer Jony Ive, but that cannot last. Jobs is no longer here to be the company's eagle-eyed design perfectionist, and Ive also appears to have taken a back seat, as he was nowhere to be found during the latest iPad release, and he hasn't recorded a video promo for an Apple product since the iPad 2.

And even if Apple can succeed without Jobs or Ive in the driver's seat, the company, like all others, can and will make mistakes. Jobs admitted to an angry Apple fan once that even though he's enjoyed plenty of failures, failing at least means decisions are being made. Apple accepts that not every one of its innovations will be revolutionary, but Apple fans cannot and do not accept that the company can do wrong.

So yes, Apple will continue to grow. Will it maintain this breakneck speed? It's unlikely, but at the same time, it's unwise to underestimate Apple's potential. The company is the most successful technology company in the world, and unless it misses out on a crucial innovation, it will continue to enjoy plenty of success in the foreseeable future.

Apple will announce its second quarter results on April 24, 2012, at 5 p.m. ET.

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