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As far-fetched as the possibility of Apple at a trillion once seemed, it now appears all but inevitable. Apple Inc. (Nasdaq: AAPL) stock has spent the better part of two decades delighting shareholders and defying critics as its valuation has passed milestone after milestone.
By January 2006, with the help of the iMac and iPod, Apple's valuation had soared to more than $72 billion – putting it ahead of rival Dell Inc.
By May 2010, with the help of the iPhone, Apple's valuation crossed $227 billion. That was good enough to pull it past another rival, Microsoft Corp. (Nasdaq: MSFT).
In August 2011, Apple first passed Exxon Mobil Corp. (NYSE: XOM) to take the title of "world's most valuable company" with a market cap of $346.74 billion. After a see-saw battle, Apple pulled away.
Today Apple is the most valuable company by far. Its market cap of $726 billion is double that of the current No. 2, Google Inc. (Nasdaq: GOOG, GOOGL), at $361.5 billion. (Microsoft is currently in third with a market cap of $357 billion; Exxon Mobil is in fourth at $348 billion.)
So when will Apple be worth a trillion dollars?
Two of Money Morning's experts have made nearly identical forecasts.
"I think Apple is $200 24 months from now," Money Morning Chief Investment Strategist Keith Fitz-Gerald announced on the FOX Business program "Varney & Co." in April. Given the current number of Apple shares, that Apple stock price would push the company's valuation easily past the magic number — to an astonishing $1.152 trillion.
One month later, Money Morning Defense & Tech Specialist Michael A. Robinson received his new Apple Watch and declared that Apple would reach the $1 trillion mark by 2018.
Still, Apple needs another $224 billion to get there. Is that kind of a leap really possible in two years or so?
These numbers say yes…
What Apple Needs to Reach a $1 Trillion Market Cap
When I last took a detailed look at this question in August 2014, I concluded that Apple's product lines would deliver enough profit by 2018 to push AAPL stock to the price needed for a trillion-dollar valuation.
Reviewing those numbers now, it appears I was wrong. I'm with Fitz-Gerald — Apple will be worth a trillion dollars in less than two years.
Apple is on track to deliver earnings per share (EPS) in its fiscal 2015 (which ends in September) of at least $9 a share. Using Apple's current (and absurdly low) price-to-earnings ratio of 15.68, we get an expected AAPL stock price of $141.12, about 12% above Wednesday's closing price of $126.60.
We need a price of $173.61 for Apple to be worth a trillion dollars, though. That will require an annual EPS of $11.07. So Apple will need an extra $2 of earnings per share over the next two years.
If you think that's a lot, let me suggest that it's almost always a mistake to underestimate Apple. Back in August 2014, the analyst consensus EPS for Apple's fiscal year 2015 was just $7.05. Now it's $9.03. That's a $2 increase in less than a year. Boom.
The consensus for 2016 is $9.72 for now. But that will be revised upward as the months go by, and the actual EPS will end up within easy striking distance of $11.07 for 2017.
Here's how Apple gets to a $1 trillion valuation…
When Will Apple Be Worth a Trillion Dollars? The Breakdown
- The iPhone: About 69% of Apple's revenue is derived from the iPhone. Until the iPhone 6 arrived, some critics speculated that the product had peaked. Er, no. The bigger screens made the iPhone 6 wildly popular in many major markets, but especially China. In the December quarter, iPhone revenue from China was up 70%. And Apple is aggressively expanding its footprint in China, with plans to double the number of Apple retail stores. Apple's been growing iPhone sales at a rate of about 13% a year. If it can get 10% growth over the next two years, and you conservatively figure the iPhone generating half of Apple's profits, you can add about $1.90 to EPS from the iPhone alone.
- Software and Services: This often-overlooked part of Apple's business includes app sales and subscription services such as the just-launched Apple Music and the much-delayed Apple television service. This high-margin part of Apple's business is expected to grow rapidly over the next two years. If a Macquarie Capital estimate of $17.2 billion in 2017 profit is accurate, this segment will add at least $1 in EPS.
- The Apple Watch: This brand-new product will add more profit and revenue than many suspect. Because it's more fashion statement than tech toy, the Apple Watch will sell a lot of high-end models with expensive bands. Slice Intelligence reported last month that one in five Apple Watch customers are buying a spare band. The gold edition will have profit margins upwards of 80% and will join the collections of those who already buy such luxury brands as Rolex and Omega. Apple only needs a slice of this market to rake in some handsome profits. The Apple Watch could generate as much as $2.33 in EPS in its first year. That alone would get AAPL to a $1 trillion market cap.
- Other Catalysts: Horace Dediu of research firm Asymco believes Apple Pay will eventually generate nearly $1 billion in profits every year. That's about $0.17 in annual EPS. Apple's ecosystem is also extending into the growing Internet of Things market with iPhone and Watch apps that can control household devices remotely. The addition of other Apple products, such as some type of auto, will generate even more profit. Older businesses like the Mac and the iPad could also make small contributions.
With so many sources feeding its bottom line, Apple will be worth a trillion dollars well before Jan. 1, 2018. And these estimates are based on Apple's P/E ratio staying below 16. If the P/E ratio rises to 17, Apple only needs an EPS of $10.21 to reach $1 trillion.
In fact, at the rate these profits are growing, it's easy to see Apple's market cap hitting $1 trillion even sooner — in 2016.
Follow me on Twitter @DavidGZeiler.
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