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Buy-side analyst looking for growth opportunities across the globe in public and private markets. Strong focus on fundamental analysis with a long term approach to investments.
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  • Apple : Does Size Matter – Market Cap At 4% Of S&P Weightage

    Apple (NASDAQ:AAPL) has emerged as the world's largest company in terms of market capitalization, a rare achievement given its 10 year low of $43 bn in 2003. On the contrary, investors are in a dilemma over its outperformance of the $480 bn market cap company. This is a burning issue continues to haunt the mind of its investors, considering its continued de-rating despite stellar performance on all counts (revenues, EPS and cash flow growth)

    At $500 bn, market cap of Apple would account for ~4% of the S&P composition. Is this a cause of concern? We believe it would not be so considering the following reasons.

    1. According to data provided by Credit Suisse of 8 companies crossing the level of 3% of S&P, 2 companies have peaked >5% over the past 2 years. This includes Microsoft at 5.4% in 1999 and Exxon mobile at 5.63% in 2008.
    2. It should also be noted that Apple has reached this milestone even after significant de-rating of its P/E multiple. Apple's 1 year forward P/E multiple in 2007 stood at 25x in 2007 compared to 10x today.
    3. This forward multiple lies in stark contrast to its counterparts that managed to reach similar relative weights in the S&P at a median P/E multiple of 24x.
    4. Finally Apple has managed to deliver superior growth compared to its peers on an historical basis. Apple's 5 year historical earnings growth of 65% and next 5 years growth of 15% is doubled the rate of its peers.

    Conclusion: Taking cognizance of the above mentioned facts, I believe Apple has far less risk of a further de-rating. Analyzing the case of IBM, the scope for Apple stock reaching 5% of the S&P weightage may not be a ceiling. Tech stock IBM reached ~6% of S&P in the1980's, draws a similar parallel, which points to a share price of $800 for Apple a distinct possibility.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL, long-ideas
    Apr 07 9:52 AM | Link | Comment!
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