I don't know if you've heard, but Apple (AAPL 0.64%) 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 (MSFT 1.65%) 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 (XOM 0.39%) 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 (CSCO 0.37%)? 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 (IBM 0.16%) 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, 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.
