COULD Apple be worth $1 trillion? It's conceivable. The
$342bn iPhone and iPad maker became – if only briefly – the most valuable
company in the United States when it surpassed Exxon Mobil on August 9.
Yet its sales have been surging 80% a year, and profit
faster. And Apple trades roughly in line with the growing US market — and at
less than half the price to earnings (PE) multiple it fetched in 2006, when
revenue growth was much slower.
Apple now trades at about 11 times estimated earnings for
the fiscal year ending September 2012. The S&P 500 index is valued at about
10 times next year's earnings. But Apple's sales growth is not far off 10 times
faster than that of the average company. The gadget producer also sits on $76bn
of cash and investments.
To get at this dissonance another way, consider Apple's PEG
ratio. This hints at the price of growth by dividing a company's PE ratio by
its projected percentage earnings growth.
A smaller figure suggests a company is cheaper. Apple's is
0.2 - low compared to growth darlings. Burrito purveyor Chipotle Mexican Grill,
for instance, comes in at 2.1, and Salesforce.com at 13.2. Pandora and LinkedIn
aren't even expected to make money.
Alternatively, put Apple on the same PE multiple it traded
on in 2006, and it would be worth almost $900bn. A premium for today's faster
growth could get it to $1 trillion. Apple can't be so cheap just because Steve
Jobs is in precarious health.
True, Apple already sells more per quarter than it did in
all of fiscal 2007, and it takes more and more success to move the needle.
Growth could easily slow.
Yet the smartphone and tablet markets are young, the
company's customers show remarkable fidelity, and areas such as television are
ripe for new gadgets.
Moreover, Apple's return on equity is almost twice what it
was in 2006, suggesting it has pricing power.
Maybe investors simply can't fathom so large a company. A $1
trillion Apple would mean adding all of Microsoft, Google, Intel and Amazon —
and more to the firm's current market capitalisation.
Perhaps Apple is correctly priced, the market too expensive, and growth stocks grotesquely so. But something doesn't add up. In relative terms, Apple should be worth far more.