Will Apple Be Helped Or Hurt By Facebook?

| About: Apple Inc. (AAPL)

One of the biggest market events is only about a month away. Facebook (FB) will go public, creating a frenzy that we might not have ever seen before. However, I'm not here to talk about Facebook. Why? Well, Facebook will be important. But Facebook's initial market cap, expected to be about $100 billion, will only be about 18% of Apple's (AAPL) current market cap.

Apple is still the giant in the room, and it will be for quite a while. However, there is something here to analyze. A few days ago, I heard someone say that Apple will be hurt by Facebook going public, not in terms of sales, or earnings, or anything like that, but by share selling. Investors will sell Apple in order to buy Facebook. So that got me thinking, and it is something worth considering. Will Apple be hurt or helped by Facebook going public?

So the reasoning behind the concern is simple. With Facebook going public, and having such a large valuation, index funds and investors would be buying lots of Facebook, and then selling shares in other companies. Since Apple is the largest company, you would figure investors and funds would sell what they have the most of.

For this argument, let's look at the iShares Dow Jones US Technology Sector Index Fund (IYW). This Exchange Traded Fund's mission is to "seek investment results that correspond generally to the price and yield performance, before fees and expenses, of the largest public companies in the technology sector of the U.S. market, as represented by the Dow Jones U.S. Technology Index." This ETF has 158 holdings, and has a total net asset base of more than $1.72 billion, as of 4/18. Of that, Apple is the largest holding, obviously, at more than 22%, or $382.5 million dollars. With Facebook's initial market cap set for about $100 billion, in terms of this ETF's holdings, that would put it right behind Cisco Systems (CSCO), in terms of the IYW's holdings, and Cisco currently has a market cap of $108 billion.

Assuming this ETF did not gain or lose any net assets, a Facebook valuation would represent roughly a 3.9% holding for this ETF, based on the $100 billion market cap. If Facebook were to be in this ETF, the ETF would hold roughly $67 million worth of Facebook. Assuming the ETF doesn't get any more money, it would need to sell $67 million worth of other names to make up for that. Obviously, the largest position is Apple, so you might expect some selling there. But even if it sold $20 million worth of Apple, that would be a drop in the bucket. Apple's market cap right now is $567 billion. The effect would be extremely insignificant.

Another idea floated around is the selling of other names. I've heard Google (GOOG) and Microsoft (MSFT) kicked around. One of those makes sense to me, and that is Google. Just think about Google. The company's latest earnings report was not great, its revenue number was in-line to a miss, depending on how you round off. Yes, earnings beat, but after last quarter's extreme disappointment, this wasn't exactly what investors were looking for. Also, the company announced a "stock split," where it will create a new class of shares that will trade separately, and they will have no voting rights. I've heard many analysts and professionals who say this might force a lot of selling in Google. Okay, so sell Google and buy Facebook. It seems logical to me. Now when it comes to Microsoft, you need to remember that Microsoft has a nice size investment in Facebook, in the billions of dollars. Investors might buy more of Microsoft to give them more exposure to Facebook. If Facebook does well and stays at a high valuation, Microsoft could hold its position or sell it for a nice gain. Either way, I think Microsoft is fine.

Back to Apple, and there is an important point I haven't even discussed yet. From the rumors coming out, it seems that Facebook will raise up to $10 billion from the IPO. That means $10 billion, and probably less, of new money coming into the name, at first, and I'm guessing it will be closer to $7 or $8 billion. Even if All of that say $7.5 billion of new money into Facebook came from investors selling Apple, Apple would decline by less than 1.5%. That's not exactly earth shattering. Now yes, once Facebook goes public, and starts getting added into certain indices, it might cause some Apple selling here and there. For example, the IYW I mentioned above. Also, if Facebook joins the S&P 500, the ETF for that index, the SPDR S&P 500 (SPY), might need to readjust its holdings. As of earlier this week, the SPY had about $100 billion in assets. But only 4.37% of that was in Apple, so that ETF only has a total of $4.4 billion in Apple. Again, that's not a lot, so if a few million dollars of Apple is sold, so what? It will be bought by someone else.

I think Apple will be helped by the Facebook IPO, in the long term. Why? Well, let's say that Facebook starts with a $100 billion market cap. Most people think there will be a price jump the first day, as everyone will try to pile into the name. Let's assume that happens, and for argument's sake, say it rallies all the way up to $150 billion (whether in the first day or shortly thereafter). It's possible that there may be some selling of Apple short term, but I think it will be short lived. Why? Well, I don't think Facebook will maintain a huge market cap early on. We've seen all these hyped IPOs fall back to earth. I believe Facebook will come back a bit, and let's say you take a gain in Facebook. If you get out of that stock, where are you putting your money? There's a good chance you'll go back to the #1 stock in the market right now. That's right, Apple.

I'm just talking about people who start owning Facebook after it goes public. I haven't even mentioned those who own it currently. Once they can start selling their shares, do you not think they will take huge gains in the name? It's quite possible. Now, some of these firms may be focused on early stage and venture type companies, so they probably wouldn't be throwing money into Apple. But others will be, as long as Apple remains the favorite. That is, anyone who sells Facebook has a good chance of buying Apple.

There's an interesting third reason too. We keep hearing about all of this money that investors have on the sidelines, afraid to invest in this volatile market. Once Facebook goes public, some of those investors might come into the market, just to own Facebook shares. If they come into the market, they probably will use some of that capital to buy Apple too, since it is the best.

Oh, and one more reason. Why can't you own both at the same time? Unless your entire portfolio is made up of Apple, and you want to own Facebook too, you probably have room for both in your portfolio. If you are going to sell something, why sell Apple? Sell something of lesser quality, for instance, Google makes sense.

Next week, Apple will release its much-anticipated second-quarter earnings report. Current estimates call for $36.5 billion in revenue and $10 in earnings per share. That's more than 45% growth in each, year over year. Even with Apple at $608, you can still buy it. The stock is about $35 off its all-time high, and the average analyst price target is $675, with the median at $700. Some analysts are even calling for Apple to reach $1,000.

I would continue to be long Apple here, and I don't buy the sell Apple because of Facebook reasoning. I just don't see it. Apple is still the best, and there is plenty of room for both to exist. If you are going to sell something to make room for Facebook in your portfolio, why sell something of the highest quality? Sell something that you consider junk. That's just my opinion, but I'm open to a lively debate. I'm willing to listen to what others may think, and I think this article sets up a nice debate to have.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.