How Does Apple Become a $300 Billion Company?

If you’ve been trapped in an ice cave for the last 13 years, you might want to hold on to something when I say this: Ace of Base is no longer the hottest act in music. Oh, and that loveable niche computer maker, Apple (Nasdaq: AAPL  ) , the one that was getting bailed out by Microsoft (Nasdaq: MSFT  ) in 1997? Yeah, it’s now bigger than General Electric (NYSE: GE  ) .

Shocking, huh?

Even though Apple’s been climbing up the list of the largest American companies for years, it’s still a bit stunning to hear: As of last Friday’s close, Apple was the third most valuable company in the U.S. It’s since slipped back to the fourth position, but the list below shows the regal company Apple’s keeping as it skyrockets up the list of the most valuable American companies.

Top 10 U.S. Companies by Market Cap

Company

Recent Market Capitalization (Billions)

1.)    ExxonMobil (NYSE: XOM  )

$318.2

2.)    Microsoft (Nasdaq: MSFT  )

$259.7

3.)    Wal-Mart (NYSE: WMT  )

$213.1

4.)    Apple

$203.7

5.)    Berkshire Hathaway

$203.3

6.)    General Electric

$194.1

7.)    Procter & Gamble

$185.1

8.)    Google (Nasdaq: GOOG  )

$180.1

9.)    Johnson & Johnson

$179.3

10.)  JPMorgan Chase (NYSE: JPM  )

$173.4

Source: Capital IQ. Prices reflective of March 18 closing price.

Put another way, here’s a chart of Apple’s enormous growth over the past 10 years.

Source: Capital IQ, a division of Standard & Poor’s.

Apple’s success has been the result of reinventing itself. It’s moved away from just “the Mac maker” into a diversified consumer electronics company. Apple not only managed to produce one of the greatest products of the first half of the decade (the iPod), but it also followed that up by creating the greatest success story of the second half of the decade (the iPhone) just as the iPod was reaching its apex. A look at the chart below shows how Apple has shifted away from Mac and iPod sales over the past three years.


Source: Company filings. Uses revised quarterly data to adjust for change in new revenue accounting principles.

A little seasick at these levels
Still, as impressive as the Apple story has been, it rightfully leaves many investors a bit uneasy. Even if the company matches up more favorably on valuation metrics than many investors would expect (for example, its forward P/E is roughly equal to Procter & Gamble’s), there’s a certain sniff test that Apple still fails.

Most other companies on the market cap list feature decades of dominance in their respective industries, and a near assurance of their continued success. ExxonMobil has been around in one form or another since the beginning of the last century. Wal-Mart has ruled retail for decades. These are companies that have huge scale advantages; there’s no foreseeable way their dominance will be challenged in the near future.

The road to $300 billion
Meanwhile, Apple’s riding a wave of confidence from a string of blockbuster products. On a relative scale, it’s still a flash in the pan. Investors are concerned not only about whether it can protect its current line-up from competition, but also whether it can keep the hits coming. As Motley Fool co-founder Tom Gardner recently said during a discussion about Apple, “It’s a great company, but I’m not sure how they keep growing. How do they become a $300 billion company?”

With that in mind, what needs to go right for Apple to become the largest technology company in the world?

Simply put, it needs to become the Microsoft of mobile.

In many ways, the mobile race is similar to the PC battle of the ‘80s. In one corner we have Apple, packaging its hardware and software in a limited number of systems. In the other corner, there’s Google (replacing Microsoft), licensing out software to any number of hardware vendors.

Apple could actually learn from Microsoft. It needs to be more than just the best smartphone on the market right now. Microsoft never controlled the operating-system market because it was the best -- it won because it locked users in, and most people essentially had to use its products. Microsoft has released some real clunkers over the years, but it took few hits from them. Likewise, even though Apple’s unparalleled in its commitment to quality-unlike a certain competitor we just discussed -- with a price tag that implies sustainable long-run dominance, Apple needs a margin of safety to ensure that even with a hiccup or two, it will continue to rule the mobile world.

The $300 billion question
So it all boils down to one question: How well can Apple lock users into its ecosystem? As developers continue building apps at rates far in excess of competing platforms and more users synch their digital lives around iTunes, you can see Apple creating a platform that’s sustainable well beyond just the next upgrade. From there, no company possesses a virtuous circle like Apple. Higher iPhone market share begets high-margin sales of apps and media, as well as increased Mac sales. Given the size of the smartphone market, the margins Apple collects from each iPhone, and the boost to other Apple products, you can see a path to $300 billion forming.

But can Apple become the Microsoft of mobile? Already, there have been pushes to make programming for different app stores more interchangeable between platforms. While early attempts seem laughable at best, this is just the first round of a protracted battle. More importantly, how much will app stores really matter in three years? While they’re tremendously important in the current generation of smartphones, future smartphones might be more open, leaving the need for an app store diminished thanks to technology changes or adapting consumer tastes. Apple doesn’t need the market share of Microsoft’s Windows to justify an enormous market cap, but it’s clear that its competitive position will always be more tenuous.

And that’s the bottom line. The more Apple can look like the Microsoft of the mobile world, the more it will be worth. Commanding a market with even half the dominance Microsoft did with operating systems is a once-in-a-generation opportunity, but I’m not so sure the mobile world is built in a way that’ll allow that.

Care to agree or disagree? Have some other thoughts on how Apple can keep growing to $300 billion? Let me know in the comment box below!

Eric Bleeker owns no shares of any companies listed above. Berkshire Hathaway, Microsoft, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Apple and Berkshire Hathaway are Motley Fool Stock Advisor picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor picks. Motley Fool Options has recommended a buy calls position on Johnson & Johnson and a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (30) | Recommend This Article (50)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2010, at 4:16 PM, lemoneater wrote:

    Apple should forge an alliance with IKEA. Together they could take over the world with user-friendly attractive products. :)

  • Report this Comment On March 19, 2010, at 4:48 PM, Wingsy wrote:

    "... Apple, the one that was getting bailed out by Microsoft (Nasdaq: MSFT) in 1997?"

    Sounds like a re-write of history to me. At the time, even though Apple had just come off a terrible year, they had just reported having 1.2 billion (yes, with a B) in cash on hand, so a stock purchase by Microsoft of 150 million wasn't/didn't make a speck of difference to Apple's future. The real deal was (1) Apple puts up IE as its default browser (at the time, MS was really out to kill Netscape), (2) MS agreed to continual and enhanced support of Mac Office, and (3) to settle the remaining patent disputes Apple had against MS (Apple was threatening a 1.2 billion lawsuit). MS paid a paltry 150 mil for that. It wasn't a bailout by any stretch of the imagination.

  • Report this Comment On March 19, 2010, at 5:04 PM, gctwnl wrote:

    Microsoft did not bail out Apple in 1997. Microsoft invested M$150 in Apple as part of a complex deal around legal wars, Internet Explorer, and MS Office. At that time, Apple had billions in the bank.

    Microsoft probably could have killed Apple at that point by dropping MS Office for it, but that would have seriously damaged their legal position v.a.v. mis-use of monopoly power.

    Apple currently is doing well because a) it offers the best user experience for most people (tech geeks excluded) and b) nobody is even close for one reason (memory architecture of iPhone) or another (App Store).

  • Report this Comment On March 19, 2010, at 5:24 PM, DJDynamicNC wrote:

    Agreed with your assessment on Apple's path to 300B. But I don't think they'll make it. Android ended any chance of market dominance on mobile platforms for Apple, and everywhere they turn they're going to run into it.

    And speaking as a musician, iTunes is a singularly atrocious experience. It can be managed, but I don't want to "manage" my music, I want to enjoy it. I buy my music from TrackItDown.net, Beatport.com, IMODownload.com, really anywhere that isn't iTunes, because if I buy from the iTunes store I'm locked in to downloading that crap program iTunes. No thank you. Keep your crap DRM and your crap organization system, Mr. Jobs. Give me MP3s I can burn anywhere and put on any device in any format.

  • Report this Comment On March 19, 2010, at 5:34 PM, sjmdesign wrote:

    Apple is a tremendous growth and innovation story.

    Probably the best run company in USA if not the world.

    Smart phone people equate I Phone great phone. Now I pad .They have to keep innovating to keep the growth up.

    There is tremendous growth rate in smart phone currently world share of smart phone is 5%

    With time this will rise to 80 to 90% the best is yet to come for Apple as they are the leaders.

    With current market cap of 200 billion and projected earning growing rapidly.

    This company could easily see 300 billion market cap soon than later. This is the growth story of next few decades.

  • Report this Comment On March 19, 2010, at 5:43 PM, TMFTomGardner wrote:

    Interesting thoughts on whether it was a "bail out" or not. While Apple had cash, they also had debt. They had whittled down market share. I'm not saying they wouldn't have enjoyed a major turnaround. So it likely wasn't a bailout. But Microsoft brought more than cash; they brought cache. Applicious fans may hate it, but Microsoft came off as the older brother that helps you through a tough time. We can argue about how much it meant. But let's be reasonable. It wasn't a necessary deal for Microsoft; it was very important for Apple, if only as a legitimizer.

    BUT, that argument isn't as important to us all now as -- how will Apple justify this valuation. At a $200B market cap tied at least in part to the extreme growth they've enjoyed, what has to happen for the company to earn $20B in after tax cashflow, a 15X multiple, and pretty clear views to 10-12% annualized growth.

    How can Apple as a stock be at an attractive valuation today, given the reliance (perhaps overstated) on Steve Jobs, given the difficulty of generating $20B in profit steadily in technology, etc. The investment thesis is feeling like a winding putt. Major applause for investors in Apple over the past decade. But I have reservations about it as an investment today.

  • Report this Comment On March 19, 2010, at 6:05 PM, TomFrog wrote:

    Microsoft dominated the PC universe through its enterprise software at a time when most computer users used the computer mostly at work. In that environment, if you bought a computer for home use it was hugely important to be compatible with the software you used at work, and to be supportable by your IT department. The IT department dictated what would be installed. As a software developer developing for Windows, you could be assured that your software would run on any Windows machine.

    In that environment, you were lucky to get a mobile phone from your company, and there was no integration between the mobile world and the desktop.

    Fast forward 15 years, and we have a saturated enterprise market, with the growth happening in the consumer segment. Mobile phones are more powerful and more connected than desktop machines were. If you leave a company you'll want to take your mobile with you. Your family members likely have a laptop each, with no IT department to support them. Lord only knows what software is installed.

    Apple's mobile platform (iPhone, iPod Touch and iPad) is the first well-documented mass-market development environment _ever_ to offer developers access to touchscreen technology plus ubiquitous connectivity plus decent graphics capability plus GPS plus accelerometer plus top-notch audio. On top of that, you can write an application once and have it run on millions of consumer devices and sell it painlessly. And it only costs you $99 to get access.

    Apple has completely changed the mobile landscape, partly with their technology but more so with their business model. Before the iPhone, developers essentially had to sell applications through the carriers - an extremely expensive process.

    As a small independent developer ( http://flagpig.com ) I can't afford to spread myself too thin. I'd love to develop for Android, but the market is too fragmented. Google needs to take back control of Android to make it truly succeed, including requiring all manufacturers to support a minimum device profile and requiring online OS upgrade. Android needs an iPod Touch equivalent to lower the cost of entry for developers. Google needs to open up the marketplace to non-US developers.

    Windows Mobile 7 looks more promising, because you can count on devices to have the same capabilities, but they've got a long way to go to catch up with the iPhone. They also need an iPod Touch equivalent (next gen Zune?).

    In summary: Apple's doing exactly the right thing so far in walking the tightrope between simple usability for consumers and cool technology for developers. I don't see a real challenger yet, but Google and Microsoft are keeping things interesting.

  • Report this Comment On March 19, 2010, at 6:13 PM, DJDynamicNC wrote:

    What's also important to note is just how fast Google rose (note the list above, with Google at 8th position). For that matter, note how fast Apple rose.

    If they can do it, so can somebody else. And "somebody else" could be a direct competitor. As the author said, the only way Apple can face down a direct competitor and keep growing is to "Microsoft" themselves somewhere. I simply don't see that happening.

    Apple is well run, with some great products, and likely will have many more great products. But I just don't see market dominence on that scale, and that means 300B doesn't seem too likely. Certainly not impossible, but I'm not banking on it.

    Google on the other hand - I'm long as heck on Google.

  • Report this Comment On March 19, 2010, at 6:13 PM, TLassen wrote:

    perfect 'castle in the sky' investment. Seems many investors never learn. Not picking on you in particular 'sjmdesign' but you captured the sentiment I often hear expressed:

    "This company could easily see 300 billion market cap soon than later. This is the growth story of next few decades" and on and on the spin goes......

    It is not just a question of how many "igadgets" a company can sell, or projected growth expectations. The questions investors need to ask are: is the company making money? Is AAPL creating wealth for their shareholders? Are they returning profits higher than the cost of their capital?

    While AAPL is definitely a profitable company, currently producing an return on investment in excess of it's cost of by around 7%, using performance valuation metrics it is difficult for most seasoned investors to justify share prices higher than $200. There is little wiggle room left should AAPL miss street expectations in the future.

  • Report this Comment On March 19, 2010, at 6:13 PM, Wingsy wrote:

    DJDynamicNC Said: "Keep your crap DRM and your crap organization system, Mr. Jobs. Give me MP3s I can burn anywhere and put on any device in any format."

    I don't think you've checked out the iTunes Music Store lately, or you would know that DRM music is scarce as hen's teeth. That, and todays tunes are encoded at a much higher bitrate, 256kbps if I'm not mistaken. Download with iTunes, yes, but burn anywhere & play anywhere.

  • Report this Comment On March 19, 2010, at 6:15 PM, DJDynamicNC wrote:

    @TomFrog - those are some good points, thanks for that input, that was an educational post. I must be sure not to sell Apple too short on their potential.

  • Report this Comment On March 19, 2010, at 6:15 PM, DJDynamicNC wrote:

    @Wingsy - I'm afraid not; after my initial run-ins with it I was scared off for life. It's good to hear that it's improving. Do I still need to download iTunes software in order to shop at the online store? That's a major, major turn off.

  • Report this Comment On March 19, 2010, at 6:17 PM, DJDynamicNC wrote:

    @Wingsy - coincidentally, 256 isn't quite enough for me, as I'm playing on club systems. Our standard is 312.

    If iTunes supports 312 (or FLAC or WAV) and doesn't force you to download its own software, I'd be willing to take another look.

  • Report this Comment On March 19, 2010, at 10:10 PM, DutchMark wrote:

    The path to $300B will involve opening up a whole slew of new profitable revenue streams through the iPad. If they can become the de facto standard for the publishing of books, magazines and newspapers there's a considerable potential of e-zines, interactive magazines, videos and video-games. And possibly a lot of stuff we just haven't invented yet.

    I'm not saying it will happen. But it could. In which case $300B looks like a very doable target.

    Another possible path is finally breaking the Windows dominance. Moving from a 5% market-share to 25% would do wonders. Not as likely, but still possible. And note that the iPad (or some future successor, maybe with Intel inside) could act as a bridge to generating more Mac users.

    I'm not so optimistic they'll actually get to $300B though. Not because I think they'll flounder (I own shares) but because it's not so easy to see what they're going to do with all that cash. At some point they'll have to start returning it to shareholders, which will depress their market-cap. If they don't and either keep it in the bank or, worse, spend it on dubious acquisitions, then it will be time to start selling.

  • Report this Comment On March 19, 2010, at 10:44 PM, mattack2 wrote:

    >ExxonMobil has been around in one form or another since the beginning of the century.

    Wow, so ExxonMobil has been around since 2001?

  • Report this Comment On March 20, 2010, at 5:59 AM, Foolfromfool wrote:

    99 cents songs, App stores, etc., were apple's game changing, kick-in-the-competitor-gut type of innovations. They would not play by your rules be it mobile or body-embedded devices.

    If they can continue to come up with something very new that other companies had not even thought of, then they can easily become a $300B company.

    One important question to ask is, what would happen to Apple if / when Steve Job would not be its CEO at some time in the future?

    Apple should make it clear that it is not just Steve Jobs' return to the company that made its recovery possible. They should highlight other factors that played the role, be it the thought-leaders within the company who were heard better, market conditions, and so on, so that investors would gain confidence about Apple's next decades.

  • Report this Comment On March 20, 2010, at 11:33 AM, shanghaid wrote:

    The path to $300 billion does not seem too complicated. But guessing how fast is complicated. I will go with the assumption that an increase in net profits of 50% will drive a market cap increase of 50%. IF two of the major underlying business, for example the iPhone and the MAC, which are 50% of Apple can double in 3-4 years then the overall profit picture of Apple will likely achieve that goal. Also assuming similar margins.

    If the iPad can within 2 years achieve sales of 5 million a year at $100 net profit, that is another $1 B a ear in net profit, getting Apple 25% to the goal of increasing market cap 50% and putting less pressure on the iPhone and Mac sales to double in the next 3-4 years.

  • Report this Comment On March 20, 2010, at 2:32 PM, Ackumen wrote:

    @shanghaid Great points. I think iPhone sales will easily double within two years once the (extended) AT&T exclusivity contract expires. And the wonderful thing about the iPhone sales is that it favorably introduces new consumers to the Apple brand, they'll be a lot more likely to pick up a Mac too.

    Regarding the iPad, Apple can easily clear 2.5 million sales per year (still not a fan of the name iPad though). Especially assuming there will be an upgraded version released new year some time.

    If the economy continues to slowly recover, I see no reason why $300B can't happen in 2011.

  • Report this Comment On March 21, 2010, at 12:51 AM, kellogg9 wrote:

    I am always amazed at how Apple, err, Steve Jobs can come out with the next big thing. Even now with the iPads release imminent i cant help but think it is an over-sized iPod with not much else going for it. But we have been down this road before and Jobs is a unique being that can perform alchemy on anything.

    Here is hoping for a stellar '10

    Kelly

    http://www.stockcoupons.com/

  • Report this Comment On March 21, 2010, at 1:32 AM, motleychang wrote:

    The Mac and Iphone are still at the low end of penetration. So possibly there is scope. When you command 65% of market then you are your own competitor. Then comes Ipad. I am a buyer of Ipad.

  • Report this Comment On March 21, 2010, at 2:58 PM, shanghaid wrote:

    kellogg9 - it is indeed for now an oversized iPod Touch. For many of us with those, however, for reading newspapers, comfortable surfing and gaming, a larger screen would be great. Especially surfing with an immediate on/off operating system and a small device that fits in your lap when in the TV room. So the fanbase has a certain percentage of users who see value in this. In addition, they put themselves into the eReader competition with a color device that can also give folks an entry into some of the cool things about apps. Finally, when you see sales number projections, we will all have to take them with a grain of salt for now. However, one thing that gets missed as people think about Apple, is the large rapidly growing international sales.

    This is really about how much can they add to their bottom line. Can they sell 5 million a year within 2 years? This is a net 25% profit increase at the company. They sell that many iPhones in 2 months. Are their enough segments who value this in addition to or instead of an iTouch? One of the things that gets atached to Apple is ever new product is judged as whether it will be the next iPod or iPhone. The likley won't hit those kinds of numbers on every new product category.

  • Report this Comment On March 21, 2010, at 6:46 PM, plange01 wrote:

    300 billion for apple? easy idiot hedge funds speculating with even bigger idiot investors money!! just like google!!

  • Report this Comment On March 22, 2010, at 2:46 PM, athmpsn wrote:

    @plange01 Yeah, because Google definitely isn't going anywhere these days.

  • Report this Comment On March 22, 2010, at 3:59 PM, gslusher wrote:

    @DJDynamicNC:

    "@Wingsy - coincidentally, 256 isn't quite enough for me, as I'm playing on club systems. Our standard is 312."

    Paying royalties on those songs? TrackItDown apparently does not include performance rights. The IMO site is in the UK and probably doesn't include any US rights.

    Also, want to bet that your listeners can't tell the difference between 256 & 312--or even 128 & 312?

  • Report this Comment On March 25, 2010, at 3:13 AM, daodell33 wrote:

    Think publishing . .. magazines, books, newsprint, textbooks. Apple will garnish substantial revenue as the largest channel for this type of genre. While there will be winners and losers . . . there is much value add that Apple brings to the table with their iPad. For example, lower cost to distribute, more updated material, faster delivery . . . the publishers, independent bloggers, authors, mobile carriers . . . etc will be net winners. paper producers, forestry companies, non-specialized printing businesses, news stands, book stores (online or not), will be the BIG Losers in this industry shift. Of course, customers will be the biggest winner of all. In any case, the print and publishing market has needed this for years. Further, there is potentially much greater revenue possible since the industry in my view is much more fragmented. When we think of the iPad, sales are definitely important but I think more for the purposes of an ongoing, stable, non-imitable profit stream for the foreseeable future which in my view will be garnishing revenue from newsprint, books and magazines. $300B is definitely possible, scary but possible.

  • Report this Comment On March 26, 2010, at 1:13 PM, INoFoolin wrote:

    The author has no understanding of how software applications are developed. Apple's hardware architecture and world-class software development platform are a defensible competitive advantage. The app store is the tip of the iceberg. The delivery of content is where the leverage will be, and iPad is a glimpse of where the personal information appliance will be the delivery vehicle. The mobile device tsunami is here and AAPL is the best positioned to ride the wave. If you want a similarly positioned stock look at ARMH. ARM owns the intellectual property for the CPU inside most mobile devices. Stock is up 125% over 1 year, similar to ARM, and market cap is $4.6B. This is an intellectual property company, so don't use traditional investment metrics, think about growth and cash flow.

  • Report this Comment On March 26, 2010, at 2:23 PM, dantoine wrote:

    Once a person buys an Apple they rarely go back to a competitor. I will be needing an upgrade with my pc which is a sony. No question my next pc = Apple

    Dennis A

  • Report this Comment On March 27, 2010, at 10:59 AM, dharen51 wrote:

    A few things that they can upgrade in the iPad which will itself surely get them to $300B mark:

    1) Put a PixelQi screen (like the Adam from NotionInk) on it, to provide the benefits of both a Kindle (E-Ink Display) and the iPad (Rich media experience).

    2) Enable Flash

    Basically, make the iPad the killer tablet around since they are already the kings of gestures!

    That being said, unless they do something with content like they did with music, they will not last in the tablet domain given the number of Android tablets (some as inexpensive as $92).

    Today there is much speculation regarding Apple's future as its OS and its hardware (A4 and not ARM/Intel) is closed, but none of this will matter if they can figure out a disruptive model for digital content/publishing.

    Apple should also think about Google's Chrome OS thats expected to be the next disruptive wave, more seriously and offer an alternative - else port its software suites to the cloud.

    Your thoughts?

  • Report this Comment On March 28, 2010, at 7:53 PM, rlcato wrote:

    @dharen51:

    PixelQi - Chances are Apple will never adopt that. They want the full-on visual experience when viewing movies and videos. Microsoft may use that with their vapourware 'Courier' project.

    Enable Flash? That ain't gonna happen. 12year old, legacy programs that's not keeping up with todays tech is so yesterday. Why do you think it's not on mobil phones? Some of those internet Flash games and a few of those internet Flash programs are being turned into 'Apps' so they can be used and cash in on new mediums like iPhones, iPads and Androids.

  • Report this Comment On March 30, 2010, at 4:50 PM, divingfool50 wrote:

    I think TMFTomG meant that Microsoft provided "cachet", not cache.

Add your comment.

DocumentId: 1136573, ~/Articles/ArticleHandler.aspx, 4/17/2014 3:06:13 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement