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.
- 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.
- 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.
- 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.
- 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.