A Look at Apple's Market Cap

 |  About: Apple Inc. (AAPL), Includes: GE, INTC, MSFT
by: Stephen Rosenman

In July of 2009, I predicted Apple would surpass Microsoft's (NASDAQ:MSFT) market cap (seekingalpha.com/article/151433-why-micr...). It did in March 2010. Today, only Exxon Mobil (NYSE:XOM) exceeds Apple's capitalization. Apple deserved to take out Microsoft's valuation; it innovated and executed circles around Microsoft. A much more formidable feat awaits Jobs & Company: will Apple pass Microsoft's 1999 inflation adjusted market cap of $486 billion? For all the talk about how sky high Apple's $311 billion market cap is, the company is nowhere near some of the capitalizations reached in the past by other companies. At the end of 1999, GE, Microsoft, and Intel all had inflation adjusted market capitalizations larger than Apple's current valuation. In 2000, GE was the colossus, a $561 billion market cap king as valued in today's dollars; GE could have swallowed Apple and had $250 billion left over;

(2000 market cap based on 10 K reported 1999 and 2000)
Microsoft, GE, and Intel had ridiculously high PEs back in 1999 and 2000. Microsoft's PE at the end of 1999 was a shockingly high 41, dwarfing Apple's 16 PE (http://sec.gov/Archives/edgar/data/789019/0001032210-99-001375.txt). Microsoft's growth had slowed to 14%, signaling excessive stock valuation. GE was over priced as well with its PE of 46, nuts when you consider its revenue and EPS growth rate in the teens that year. Intel was a pricey PE of 33. 1999 was a period of excessive valuations, one of the biggest bubbles in recent history.
Apple's modest PE is far from bubbly.

Apple has a PE of only 16, modest when one considers its explosive growth: 3 year and 5 year revenues up 40% and 36% respectively and 3 year and 5 year EPS up an average of 57% and 58% respectively. Moreover, Apple has accelerated revenue and EPS growth. Apple delivered 2 strong quarters, soundly beating estimates and showing investors considerable growth in earnings and revenues. Q2 revenue and EPS were up 83% and 91% respectively. Q1 revenue and EPS were up 71% and 75% respectively.
Analyst consensus estimates of EPS for FY 2012 stands at $28.60. That number has been raised by the analyst community about 10% every 90 days; it was $26.15 just 3 months ago. The consensus has underestimated Apple for years, a trend likely to continue.
Assume Apple only earns the consensus $28.60 in 2012 (a number Apple will likely beat handily). If the market gives the company a PE of 18, Apple would reach a share price of $515. The company would have a market cap equal to that of 1999 MSFT. Apple would be up 52% despite having only a modest boost in its PE.

(Apple's 1999 inflation adjusted market cap was $6.6 billion)

While GE, Intel, and Microsoft all had greater inflation-adjusted market caps in 1999-2000 than Apple has now, their PEs were insanely higher. Apple's relatively low PE compared to its growth suggests that its market cap and share price are far from done going higher. Apple is nowhere near a bubble in price as occurred with GE, Intel, and Microsolft at the heights of their valuations in 1999 to 2000. Apple is undervalued and deserves a much higher share price.

Disclosure: I am long AAPL, INTC.