Amid the Market Carnage, Apple's the New King

Only a bit more than a year after it passed Microsoft (Nasdaq: MSFT  ) as the most valuable company in technology, Apple (Nasdaq: AAPL  ) has its sights set on a new target: the most valuable company in the world.

In the middle of the day, Apple briefly passed ExxonMobil (NYSE: XOM  ) to become the world's most valuable company. Afterward, Apple slipped back a bit, but make no mistake -- we witnessed the passing of the torch today.

For Apple, today's news is a long way from the bottom. In late 2000, Apple was worth just short of $5 billion, while Exxon was worth more than $300 billion, and Microsoft sat at a value of more than $360 billion. Despite its explosive growth since then, Apple still would've had to grow 56% to reach ExxonMobil's size just a year and a half ago, as this chart from last March shows:

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

However, since then Apple hasn't just continued to sell enough iPhones, at fat enough margins, to command nearly two-thirds of all mobile phone profits. It's also released the iPad to a world skeptical of the need for what basically amounted to a larger iPhone.

The iPad doubters were wrong. As each quarter passed, and Apple obliterated estimates again and again, Wall Street proved wrong, too. Apple's stock kept soaring, while fumbling competitors like Microsoft saw their stock stagnate.

Source: CapitalIQ, a division of Standard & Poor's.

Brushing off the market carnage
The ascent of a new stock market king comes amid Wall Street panic. In the past week alone, oil fell nearly 18%, as investors feared a double-dip recession would curtail demand. That explains ExxonMobil's 12% plunge during that time. However, while it has seen its own 6% drop, Apple has hung on far better than either Exxon or the general market during the past week's panic.

That might not seem fair to investors. After all, Apple sells premium-priced products, which simple logic dictates should struggle in a double-dip recession. If investors are fretting over that very scenario, and sending markets crashing in the process, shouldn't Apple be falling more than other stocks instead of swiftly rebounding ahead of the market?

Brushing off consumer fears
No, it shouldn't. You can largely thank the unique business model of the iPhone, and smartphones in general, for that resilience. Apple sells iPhones to carriers at an average price that exceeds $650 per phone. Competitors such as HTC might sell their phones to carriers at a price around $450, but in the end, carriers subsidize both models -- meaning they effectively eat part of the cost of the phone -- and are sold at relatively similar prices. In the United States, top-end smartphones generally sell at about $200 after contract. This artificial market, where phones are subsidized and consumers generally don't realize the full cost of their purchases, allows Apple to collect those amazing profit margins on its phones.

Another economic downturn could hurt Apple's other product lines, like Macs and iPads, which aren't as heavily subsidized. It might even force consumers to reevaluate their pricey data plans. But on the whole, the iPhone's driving Apple's bottom line. It now contributes 47% of Apple's sales, and an even greater proportion of its profits. With the iPhone holding up better than expected even as the economy sputters, Apple's continuing growth looks like it's in good shape.

But wait, there's more good news!
One other area is driving Apple's results: booming international sales. That's a common trend, especially in technology; Intel (Nasdaq: INTC  ) credited growth in markets like China and Brazil for its ability to crush analyst estimates last quarter.

Once again, analysts lowballed Apple's ability to succeed abroad. Consumers in these markets don't have a lot of money. In China, a new unlocked iPhone would eat up 49.7% of the average citizen's annual household income. Also, while contracts that subsidize phone costs are common in developed markets, in emerging markets it's more common for phones to be sold at their far higher actual selling price.

However, against all these obstacles, Apple has seen demand boom across the world, with the highest growth seen in developing Asian markets.

Market

Sales Growth Between 2005 and 2010

Profit Growth Between 2005 and 2010

Americas 268% 682%
Europe, Africa, and Middle East 508% 1,518%
Japan 331% 1,156%
Asia-Pacific 727% 2,991%
Source: Capital IQ, a division of Standard & Poor's. Retail sales are distributed in proportion to general sales level. Accounting for regional differences in retail store sales, end sales may differ slightly.

Just last quarter alone, Apple was proud to brag that sales to Greater China had grown sixfold. Last quarter, sales to Greater China totaled a sizable $3.8 billion. Even if American and European growth fizzles off, Apple should still see continuing growth in emerging markets.

The new king to stay
So even as the market crashes around us, Apple's growth story looks surprisingly strong. While investors might be afraid to buy Apple, based on either its sheer size or their own fear that another recession could quickly sap its growth, the company's future looks surprisingly strong. Trading at just 14 times earnings, with plenty of growth ahead of it and $76 billion in the bank, Apple still looks like a compelling deal. The crown atop Steve Jobs' head appears perfectly fitted.

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Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Apple and Microsoft. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (22)

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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 August 09, 2011, at 6:15 PM, techy46 wrote:

    Stockholder's have $66 billion in equity in Apple and $155 billion in Exxon so I guess Exxon's more valuable than Apple. As for market cap, people have more invested in Apple than Exxon based on today's closing stock prices.

  • Report this Comment On August 09, 2011, at 6:16 PM, daillengineer wrote:

    beautiful. i don't know what else to say!

  • Report this Comment On August 09, 2011, at 6:27 PM, Fool wrote:

    Interesting also to look at the political pressures faced by Exxon but not by Apple.

    The US needs oil. And it's dependent on the IOC's (XOM, CVX) to get it. But no one wants to pay too much at the pump -- and there's a collective public outcry whenever oil companies are producing record profits.

    On the other hand, people are rejoicing to see Apple, who sells consumer discretionary products, post out-of-this-world profits. Even throughout the recession.

    I think as soon as the torch is passed, AAPL's going to take off even farther without looking back.

  • Report this Comment On August 09, 2011, at 8:12 PM, AaronRogers wrote:

    Its because apple pays no dividend. So I caution strongly. At 14 P/E its not expensive and I'd go as far as to say value priced. However, a share holder has only one way to realize profits and that's via growth and then presumably share appreciation. However, these are two very risky paths at this juncture and that is why Exxon is and will in the end always be more valuale. Perhaps Apple will overtake for a year or two but that will not last long.

    First off let's take the latter of share price appreciation:

    1) If the market slides P/E's compress period. No matter growth rates no matter book values. Look at banks currently as a solid example.

    2) Market appetites and for a market P/E' ranges from single digits to as high as 40 like in 1987 so yes even Apple with its growth might not be rewarded currently.

    3). No dividend. Why hold it? What do they pay me to hold it. Exxon has more cash and does pay one for me to hold.

    4) No matter what at a 400 price tag less people are willing to buy. This creates stability with regards to traders but this issue is real. How many people actually buy vs want to for a berkshire (thus berk B). Also, bigger market caps just seemed destined for lower P/E's no matter growth logical or not.

    Growth Issues to warrant share appreciation:

    1) Ummm global growth is a concern and does warrant concern for both Exxon and apple however, Exxon is a necessity not apple.

    2) Unsustainable: without another new product (which apple if any company can they can) with a huge impact like ipad no way is this trajectory sustainable

    3) Field- oil may eventually be replaced and so exxon bought huge nat gas. Lol energy is always needed and it depletes making it a forever growth story as populations always grow. Tech...well microsoft will never be thumped oops as this story shows it took only 5 years from a company facing bankruptcy at one point. Yes bankruptcy now look. Think about it. Blackberry is responding. Nokia is not dead or more over how about a titan like google. Or someone else. What if a virtual reality communication device is developed. Maye that's crazy but is it really. Imagine the impact.

    Enjoy apple. However, buffet was bested by gates and both were bested by Slim and all are at risk from that guy in Brazil. It happens. So yes apple might but trust this it will be short lived

  • Report this Comment On August 09, 2011, at 9:54 PM, Amaretto6 wrote:

    I'm hearing you Mr. Aaron Rogers, you make some valid points, but I bet you're not shorting Apple. Everytime Apple is doubted, they just prove the naysayers wrong.

  • Report this Comment On August 09, 2011, at 11:22 PM, DBrown7 wrote:

    Apple has $76 billion of net cash (no long term) debt. Apple's long term investments have the safety of cash. XOM has far less cash and $12 billion of long term debt.

    Berkshire Hathaway has never paid a dividend. That hasn't prevented the stock from growing at a compounded rate of more than 20% over the last 40 years. Also, was the price growth of Berkshire's A shares inhibited when the share price was $100, $500, $1,000, $5,000 or $10,000? Obviously, not.

  • Report this Comment On August 10, 2011, at 12:50 AM, jekoslosky wrote:

    Resistance is futile. You must assimilate.

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