Remember When Cisco Had A Market Cap Of $500 Billion? What About Apple?

| About: Apple Inc. (AAPL)

Apple (AAPL) has a market cap of nearly $600 billion, the largest in the country, and seems to be on a trajectory to be the first corporation in history to have a market cap of $1 trillion.

Investors seem to focus more on buying more than selling. They are attracted to buy when momentum perks up their interest. They should be buying when everyone is selling and all hope is lost, that's the discipline, but they rarely do it well. And selling the same is true. They sell when forced to, and when they fear everything they have will disappear, when they should be selling when everything is going great and momentum is still attracting investors.

It is hard to know when that maximum moment is, but I submit in the case of Apple, there are a few landmarks that give you an idea when you are in the neighborhood.

Cisco (CSCO) was up to dizzying heights around 2000. It went past $80 per share and had the largest market cap of any company, up around half a trillion. It had a PE of over 120, greatly overvalued, and that $80 price turned out not to be sustainable. Cisco fell from $80 to $12 per share, and while around $20 these days, its market cap is only around $100 billion. A far cry from $500 billion.

Apple, by contrast, has a PE of 18, which seems relatively modest for such a spectacular performer. A PE of 25 would put the stock at $818, and a PE of 30 at $982. Probably it will take some more earnings plus some PE expansion to get to a thousand, and a little more of each to get a trillion on the market cap.

Perhaps the best understanding of Apple comes from studying Sony (SNE). Steve Jobs had a fascination with the Japanese electronics company, and his big success came when he made, in effect, the first Walkman with a hard disk. Sony, which has been without its leader, Akira Morita, since 1994, never got there. Akira Morita, as he was wont to say, bet the company on Trinitron technology, and he won the market. Leaders do matter. Morita would have been less likely to miss this important innovation. As it is, Sony announced that it will be letting 10,000 workers go. Investors, take note.

Apple still owns the Walkman-with-a-hard-disk/memory chip market with the iPod in its various iterations, but the iPhone has at least one important smartphone competitor, Google. Android is the operating system used by a number of manufacturers, what we might call the social approach. The iPhone's operating system is used by only Apple. These control games seem to go on endlessly. Sony lost the video format game, Betamax, to VHS, which its competitors piled into. Apple never shared their operating system, and Mac never really won the computer sweepstakes.

Sony learned from the Betamax experience, so that by the time they readied another new format, Blu-Ray for DVDs, they mobilized not only their own studio, but other studios as well, leaving Microsoft's competing format in the dust. Apple learned something from this, and when they brought out the iPod, it included other formats, and the really clever thing was the iTunes store.

In the meantime, Apple and Google (GOOG) are squaring off for a possibly ugly jousting match. Apple and friends bought the Nortel wireless phone patents, and Google bought Motorola's hoard of patents. This has forced Google into an impossible situation. They are stuck with a smartphone manufacturer which competes with its operating system customers. Apple knows about manufacturing. Google would like to get into it, but it remains to be seen how this all will play out.

Apple made tremendous inroads into the tablet market, which Bill Gates expressed an interest in a decade or more ago. (Leaders count: Bill Gates is no longer head of Microsoft.) The tablet was a device which played into all of Steve Job's strengths--his passion for ease of use and well-designed machines, but competitors are not standing idly by. Android powers a number of tablets. Microsoft (MSFT) is a monied and fierce competitor, and in this case, its chief business, operating systems, is on the line.

As tablets come on, and as they become more and more powerful, laptops will come under pressure. Now most laptops come with Microsoft's operating system, but most tablets come with Apple's or Google's operating system. Expect Microsoft to fight hard for this business. Let's call competition reason number one to think about selling Apple.

Speaking of competition, interestingly, I read an interview with Laszlo Birinyi in Fortune (March 9, 2012), in which he was recommending buying Research-in-Motion (RIMM), which has been all but written off by the tech community. Birinyi comes to this idea with an interesting credential; he recommended Apple in 1997 at the price of $7.

Okay, competition is the number one problem that Apple will run into, but as mentioned with Sony above, leadership matters. We've seen what happened to Sony without Morita. And now Steve Jobs is gone, but also the numbers of devices to which his treatment can be applied to is also dwindling. Let's call this reason number two.

So, if one sold because Steve is gone, that would be a legitimate reason to let go. However, it is likely Jobs had already started his magic on the television, and we need it. Some us would just like to like to tell the television to search for a program online or on our cable service and play it. Or ask Siri a question.

Cook is not Jobs. He got the big bonus not for his innovative work, but for his work on costs, which was accomplished by shipping a lot of jobs to China, but Jobs' legacy should be good for this one last innovation, the Apple television. I have little doubt that Jobs's team can steward this one last product to superlative reviews and sales.

Putting this altogether, I would hold Apple for the first quarter's results after the Apple television comes out. Jobs' vision should hold for one more device, but after that, the competitors will start to munch on its market share and margins, and that's when I would look elsewhere.

And do not forget the advice of Lord Rothschild who said, "The reason I am so rich is because I always sold too soon."

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

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