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The Answer to Apple's Massive Market-Cap Conundrum

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I don't know if you've heard, but Apple (NASDAQ: AAPL  ) isn't the world's largest company anymore. Worse, it's not even a $500 billion company anymore. Is this the end? Has the unstoppable Apple finally stopped? The howling vortex of 24/7 Apple coverage has plenty of opinions on the subject, but most analyses focus narrowly on Apple itself without considering the more general market conditions that give rise to monster-sized companies.

I took a look back through history at the true monsters of market caps when Apple first broke past Microsoft's (NASDAQ: MSFT  ) nominal dot-com-era peak last August. Apple maxed out a month later with a market cap of $658.2 million. Apple, of course, has since succumbed to the victor's curse and is now significantly below its peak, although it remains one of the most valuable companies in the world. How does Apple's fall compare to the rise and fall of other notable top dogs of the past? And, more importantly for investors, how realistic is it to expect Apple to do what no other megacap has done in more than a decade -- break its own all-time record?

How big did they get?
Let's start by revisiting my first graph, which examined Apple's market cap peak against the other largest all-time highs of the modern era. All of these market caps are measured in nominal terms, as adjusting for inflation would be somewhat unfair to companies that enjoyed excessively inflated valuations at their peaks, as well as to Apple, as it's less likely to ever surpass marks set more than a decade ago:

Sources: Barry Ritholtz, Yahoo! Finance, Wolfram Alpha.

Apple climbed a bit more than $40 billion higher than Microsoft and about $130 billion higher than ExxonMobil's (NYSE: XOM  ) peak just before the oil bubble blew apart in the financial crisis. Thus far, it has held up better than most. Only ExxonMobil is remotely comparable in terms of maintaining most of its pre-crash size. However, all of these companies have grown significantly since they topped out -- with the exception of Apple, which hasn't had enough time to grow significantly yet.

Sources: Wolfram Alpha, Morningstar.

There's only one instance where a company peaked at a higher net income than it has earned over the past four quarters, and that's Citigroup (NYSE: C  ) . You can blame that on the financial crisis. Most of the tech companies have posted substantial growth since their market caps peaked, with the exception of Intel (NASDAQ: INTC  ) . That can explain why it's still so far beneath its peak, but what about Cisco (NASDAQ: CSCO  ) ? It has grown its earnings by more than 300% since the dot-com bust. Well, in that case -- as with several others -- the stocks' peak-cap multiples make a big difference.

Sources: Barry Ritholtz, Yahoo! Finance, Wolfram Alpha.

Cisco actually cuts off less than halfway up the chart. Its P/E was so bloated compared to the rest of these companies that none of the others would have displayed properly if its full peak P/E had been shown. The takeaway here is that valuation does matter, but not in isolation. ExxonMobil and Citigroup are near their valuations in large part because their businesses are so well-known that investors know they're getting into something presumably stable and consistent.

Citigroup's 55% valuation drop in spite of its 10% decline in P/E can be easily linked to the financial crisis. Banks, as I've noted before, tend to maintain relatively stable P/Es so long as they don't blow themselves to smithereens. This could be Apple's future as well. Its P/E was already so low at its peak-cap level that a return to normal wouldn't take much effort, but investors are likely to be unwilling to bid shares up to a significantly higher multiple without some huge catalyst. At Apple's current scale, that would have to be something bigger than the iPhone and iPad combined -- and that seems unlikely at best.

The question is: How much effort would it really take for these companies to get back to their peak-cap levels? We can generally assume that they won't be rising to triple-digit multiples anytime soon -- or even to a P/E of 40 or 50. Let's work with what we already have right now:

Sources: Wolfram Alpha, Morningstar.

This is what it would take for each stock to recapture its all-time peak if their P/Es stayed exactly the same. With some -- particularly IBM (NYSE: IBM  ) and ExxonMobil -- this is eminently achievable. Could Apple do the same? Right now, that might be a tall order. But a single-digit P/E shouldn't last forever. If Apple can keep growing its bottom line, it might not take it long to regain its crown:

Sources: Previously referenced sources, author's calculations.

You can see here that some companies could easily achieve and surpass their old peaks. IBM is already on the edge, and Oracle, Pfizer (NYSE: PFE  ) , ExxonMobil, and Wal-Mart could all make it with only a 50% increase in their current P/E ratios, with no further growth required. That's hardly out of reach for all but Pfizer, which already holds one of the highest multiples in this class. Apple is on the cusp of joining that class as well, as a 50% increase in its P/E would leave it with a gap of about $2 billion to make up on the bottom line -- easily attainable with only a little bit of growth.

So can it be done? Can a former market-cap king regain its all-time crown? It's a rare occurrence, and it hasn't happened yet in the dot-com era. But it's looking quite possible for more than one stock. Will Apple be the first? Will IBM? If personal bests start falling left and right, we might have one of the clearest signs yet that this ongoing bull market is the real thing.

Of course, a company as large as Apple can't reclaim its glory without a good fundamental reason. If Apple's growth is really over, then reclaiming the market-cap crown will be nearly impossible. That's why it's so important to stay on top of Apple's progress with a dedicated research service that gets you the news and information that matters. If you're still wondering whether to buy (or keep holding) Apple, our tech analysts have the inside scoop that can help you decide. Click here to get your subscription today.

Read/Post Comments (4) | Recommend This Article (6)

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 January 28, 2013, at 1:13 PM, EquityBull wrote:

    Stock is too broken to hit new highs. Cook could have stemmed this easily months ago before all the damage had been done. Nobody will ever see Apple (the stock) the same way again. It's over. He blew it. Simple buyback and dividend or split would have tamed the best on the stock.

    He let this go into a tailspin. The stock drop on Wall street is spilling over to main street. People now question more than ever what their next purchase might be.

    A company must not only manage the company itself but the stock as well. Ignoring it and the shareholders will not get you the respect of shareholders. This shows up in your valuation. I was long Apple for 5 years until this conference call. Earnings were fine. Apple's treatment and attitude to the owners were not so I voted with my feet and sold. Better companies to own now that do care about shareholders. Much more upside with less risk. Don't fall in love with any stock.

    Even Buffett told Jobs to buyback stock with all that cash. Had he listented and allocated just 20% of onshore cash for buyback apple would be making over 80/share in EPS today. Apple prefers the cash in the bank losing to inflation each year. Wait for that rainy day like Nokia and RIMM where you start burning through it to stay alive.

  • Report this Comment On January 31, 2013, at 9:26 AM, StopPrintinMoney wrote:

    APPL's margins are shrinking !!!!!!!!! They're losing market share to a better platform, too. iBuuble has popped.....

  • Report this Comment On January 31, 2013, at 9:54 AM, okov wrote:

    How big Apple is or what it does to it's stock is irrelevant. Any company has a certain value, and that's based entirely on their business model and prospects for growth. If they do well, the owners (including shareholders) do well. Frothing day traders aside, that's all there is to it.

    The recent drop in Apple puts it at a fair price to buy, and here's why: Steve Jobs wasn't some one-man mad scientist creating innovative products, if anything he was a fantastic salesman. To expect that all of a sudden the company is somehow "lost" without him is silly. Apple has a huge market share, an even bigger name, and enough cash to expand both.

  • Report this Comment On January 31, 2013, at 10:02 AM, JeffParrel wrote:

    I sold AAPL on October 15,

    per this signal:

    Now is good time to load up with AAPL,

    but I will not hold it till my retirement.

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