Apple: Cheap at half a trillion dollars?

Apple (Nasdaq: AAPL) shares have been on a monster rally so far this year. We’re only two months in, and the Mac maker is already up by about a third year to date.

It seems as if every day it hits a new all-time high — as it did again with Wednesday’s intraday mark of US$547.61 – shortly after breaching US$500 earlier this month. The company hit another major milestone just last month, when its market cap topped US$400 billion for the first time ever, and merely over one short month later I’m happy to report that we’ve reached yet another landmark threshold.

Apple currently has 932.21 million shares outstanding, which means that a price of roughly $536.36 gives way to a market cap of US$500 billion, or half a trillion dollars. Shares now stand a healthy head above that point, and the company joins an elite club of heavyweights that have been there, done that.

Join the club

The five other members of the club have since left the party prematurely, with Apple now holding down the fort. They included longtime rival Microsoft (Nasdaq: MSFT) , networker Cisco Systems (Nasdaq: CSCO), Chipzilla Intel (Nasdaq: INTC) , conglomerate General Electric (NYSE: GE) and oil baron ExxonMobil (NYSE: XOM) .

The Wall Street Journal provided a handy table of when each respective market cap peaked.



Market Cap

Microsoft December 1999 $604 billion
Cisco March 2000 $538 billion
GE August 2000 $581 billion
Intel August 2000 $503 billion
Exxon July 2009 $514 billion

Source: The Wall Street Journal.

You’ll note that most of those were over a decade ago at the height of the tech bubble, and all but Exxon now stand well below those heights.

Apple Market Cap Chart by YCharts

There’s been a lot of talk on whether Apple can earn the title of the world’s first trillion-dollar company. We’re talking about doubling from current levels, even after being up 170% over the past two years alone. Let’s consider what it would take to reach a 13-digit valuation.

Some numbers games
We can start with a few important assumptions. Apple’s outstanding shares have steadily risen over time, but for simplicity’s sake let’s just stick with its current 932.21 million. That implies a per-share price of $1,072.72 to reach a trillion-dollar capitalization.

Shares currently trade around 15 times earnings, which is below its five-year average P/E ratio of 22.6. Apple’s P/E ratio has mostly trended down over the past few years, as some argue that the “law of large numbers” keeps shares undervalued by most traditional metrics.

Apple has pocketed $35.13 per share in earnings over the past four quarters. Using the five-year average P/E ratio of 22.6 implies that the company would need to reach $47.46 in trailing-12-month (TTM) earnings per share to be worth a trillion. Using the 15 multiple implies $71.51 required in TTM EPS.

Even that high-end estimate using the lower multiple would require 103% growth in TTM EPS, but you might recall that last quarter’s bottom line grew by 118%.

Correlation is not causation

Meanwhile, Asymco’s Horace Dediu has noted a very strong correlation between Apple’s share price and its cash position since October 2008.

Earlier this month, Dediu used this relationship to predict that Apple would soon top $500 per share, which it did the following trading day. Using the formula he derived and assuming this correlation holds, roughly $231 per share in cash would correlate to a trillion-dollar valuation.

Apple currently has about $105 per share in cash and investments, so that approximate target is 120% higher. Two years ago, Apple had almost $44 per share in cash and investments, meaning its coffers have grown by 138% since then.

Correlation is not causation, but I still think Dediu is on to something here.

Fine print

These are some very elementary conjectures with some unrealistic assumptions to keep in mind. Apple has steadily increased its outstanding shares, and its P/E ratio is even more difficult to forecast than are those of its peers by sheer virtue of its massive size. Its towering capitalization, coupled with triple-digit growth, makes it unique and hinders many traditional comparative valuation techniques.

Dediu partially accommodates for the increasing shares outstanding by using a weighted average, but he doesn’t factor in the distinct possibility that Apple may soon pay out some cash as either a one-time or regular dividend.

That being said, they show that within the context of Apple’s continued momentum, which is accelerating, we might be there in no time.

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The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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