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Apple's growth vs. top 10 largest market caps

Apple’s stock price has been rising. Although it’s still priced at a P/E of 22 while facing near term EPS growth well above 50%, this is belated recognition of the potential of the iPad and the iPhone.

However, as it has grown, Apple’s valuation is now not only higher than any other technology company but it’s nearly the most valuable company on the planet. There is a theory that ultra-large market caps are reserved for companies that are past their prime. Sometimes this is attributed to the law of large numbers: that conclusion that big numbers cannot grow much bigger because compounding growth is exponential whereas markets are limited and become quickly saturated.

The trouble with this theory is that “large” is relative; large is often simply “the largest”. Large market caps are not what they used to be. During past booms, large caps touched a trillion dollars. Today, the largest market cap is merely $314 billion.

So I don’t put much faith in large number “laws”. The real question of under/over-valuation rests on whether the company is growing or not. Valuation is simply the net present value of future free cash flows (plus assets). So the most important determinant of current value is growth in cash flows.

It’s fairly easy to assess this: compare P/E which is a proxy for valuation with EPS growth. The following chart does this for the top ten largest market caps traded on US exchanges (as listed by finance.google.com).

One should see some correlation between the two variables, but given the 5 year time frame, many of these companies showed large volatility. There are outliers like HSBC which has a rapidly rising value even though it was badly affected by the credit crunch.

The other outlier is Apple. The company showed 93 percent EPS growth over a five year period and has a P/E of 22. The company with the next highest total value (Exxon Mobil) had 0.5% growth with a P/E of 12. The company with the next lowest total value (Microsoft) had 13.3 percent growth with a P/E of 12.

For an ultra-large cap, Apple’s growth is unprecedented and extraordinary. It’s in fact off the scale. The average growth of the other 9 top caps is 3.6 percent!

Apple’s growth is a factor of 25x higher. The P/E is only 1.6x higher.

The result has been a much higher appreciation in the stock price as shown in the following chart.

So it’s clear that Apple, in this peer group, is far from ordinary.

Data follows:

  • Rob Scott

    Thank you the info and analysis. Simple amazing stuff.

    I guess what makes Apple so unique is that they hold minority share in all the markets they compete in except for music and MP3 players.
    They will grow while the PC industry is tumbling. They will grow in mobile phones as people upgrade from dumb/feature phones to smartphones and as people dump Nokia and Android for iOS.

    The tablets market is just starting. And they have their eyes on TV and advertising. What about consoles and full blown TV sets?

    If only I had money to invest!

    Another great article is from Posts At Eventide http://bit.ly/aplX6p. Check it out people. And if you have not bookmarked Posts At Eventide, do so today.

    I am simple amazed by the brain power that these guys who follow Apple posses.

    Here are my favorites that I suggets you start following as well:

    Horace Dediu
    John Gruber – http://www.daringfireball.net
    Daniel E Dilger – http://www.roughlydrafted.com
    Posts At Eventide – http://www.postsateventide.com
    Daniel Tello – http://aaplmodel.blogspot.com/
    Bullish Cross – http://bullcross.blogspot.com/
    Kontra – http://counternotions.com/ and
    MacDailyNews – http://macdailynews.com/

    Keep up the good work people. You are educating and entertaining us at the same time!

    • Famousringo

      "What about consoles and full blown TV sets?"

      Apple already has a presence in handheld gaming consoles in their mobile devices. Apple TV can be a challenger to home consoles as soon as they add an App store and a compelling interface to it. This is a move that Apple clearly doesn't feel ready for yet. Perhaps their waiting to develop a good Interface for a TV screen, or a broader user base for Apple TV, or for premium game developers to get more involved with iOS.

      As for TVs, I just don't see it. The screens themselves are pretty commoditized. All the interesting software and content comes from boxes plugged into TVs rather than TVs themselves. Easier to sell a box for $100-300 to people who already have a screen from Samsung, Sony, et al. than to charge $1000 for an integrated package.

      • Ted T.

        @Famousringo " Easier to sell a box for $100-300 to people who already have a screen from Samsung, Sony, et al. than to charge $1000 for an integrated package."

        Computer monitors are totally commoditized — yet Apple sells iMacs (integrated/computer monitor). Heck they even sell the 27" Apple CInema DIsplay, which from what I can tell is unique spec/price wise in th monitor market.

        It can further be argued that consumers have shown an unwillingness to *buy* TV set top boxes. HDTVs on the other hand, they do buy, commoditized or not.
        If Apple seriously wants to compete in the set top box business, they may be forced to sell it integrated in an HDTV.

        Now I'm not saying Apple will or should sell HDTVs — I'm just pointing out the "commoditized/saturated market" argument doesn't hold water — the same could have been said for cell phones (and was, repeatedly).

      • famousringo

        Point taken.

        The key difference I see here is that consumers replace computers every five years or so. They replace smartphones every three years or so.

        With TVs, consumers expect to get a decade or more out of them before they consider replacing. It just doesn't seem possible to build a TV platform quickly if you integrate it with the screen rather than offering a separate box.

        I also think that condemning all set top boxes is a little narrow-minded. A set top box is fundamentally no different than a VCR or a game console: A device that enables new content for your TV. The reason why DVD players and Playstations have sold well while Tivos have not is simply because they present a better value to the customer. Apple needs to find a way to cross that threshold of value.

  • Rob Scott

    Simple amazing!
    Here is another article: http://bit.ly/a9SGgD. Same theme as this one…

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  • Fred Crandle

    Whatever happened to the old fashioned PEG ratio?

    • http://www.asymco.com Horace Dediu

      The PEG ratio is based on the future growth which is based on consensus of analysts which have shown huge error rates.

      I proposed an alternative valuation metric with respect to growth called PETG here:

      http://www.asymco.com/2010/08/01/apples-valuation

  • Christian Bell

    When you say “the most valuable company on the planet,” I think you’re looking at US stock markets only. The company with the highest market cap in all global markets is a Chinese bank, if I remember correctly. Market cap around $600B.

    Everything else in this post is spot-on.

    • http://www.asymco.com Horace Dediu

      Thanks for the correction. I got my data from finance.google.com

      http://www.google.com/finance/stockscreener#c0=Ma

      It covers all equities that are traded on US exchanges. I assume that does include any companies traded using ADRs but it does not include many foreign companies.

  • berult

    This outlier dot on these graphs explains very well Apple's play smart strategy with regulators in the U.S.,the EU and Asia.

    Give in on the peripheral, showboat your corporate social underwriting, stand tall on, and solidly anchored in, your core business philosophy. Cut the ganged-up competition off from leveraging Government controls and regulations in their attempt to rein in Apple's mad dash into 21st century Eldorado.

    Apple's acumen reaches far and wide, and deep; off the charts, see charts above…

  • Terry Gregory

    Bank of China is government owned.

  • John

    Greetings

    Is that a 5 year TOTAL earnings growth estimate? If so, that seems a bit low given the current 2010-2011 earnings growth will be >50%.

    regards
    JohnG

    • http://www.asymco.com Horace Dediu

      It's compounded.

  • Tom

    Ouch!! My brain hurts! I just got an idea, Horace.
    Is there a way you could set up a spot where any of us could post something we would like you to blog on?
    For example: a researcher blogged that Android Internet use is passing iPhone Internet use. This passing has occurred during the past few months. In passing, the blogger said he wanted to be fair, and so excluded all other iOS devices.
    My reaction to this is that he's deliberately distorting the real situation. Millions of iPhone users bought ipads and use them instead. Of course the iPhone Internet use is not keeping pace with android use.
    So is there some way to graph out iOS Internet use BY DEVICE over the last 6 months? This would add to the understanding of iOS usage.

    • http://www.asymco.com Horace Dediu

      Measuring internet use has been problematic and not just for the reasons you cite (device/OS split). The companies that monitor this suffer from selection bias. They usually sample usage from a product they ship (ads, banners, etc.) All these products are selected by users not put in their hands by a random selection process. (Classic case is admob trying to tell the world how many ads are served by platform even though they are owned by Google and are attached via specific types of apps). I never rely on internet share data as I would not monitor my own site's "ranking" on the basis of such tools. There might be some value in looking at trends in the data, but not much value in comparing platforms.

    • Famousringo

      I have no idea what source your Android blogger used, but the best resource for Internet usage I have found is Net Applications. They aren't perfect, but they also aren't constrained by reliance on a single network (admob metrics) or a particular class of user (w3schools). Here's their trend for iOS vs Android internet usage:

      http://www.netmarketshare.com/operating-system-ma

      They just recently started to merge the various iDevices into one iOS category. Of that 1.13%, the iPod touch represents about 0.13%, the iPad 0.27%, and the iPhone 0.73%.

      Android has a way to go before it beats worldwide iPhone usage, let alone overall iOS usage.

      • Tom

        @famousringo
        Thanks for the excellent link. It shows iOS as way ahead 1.13%.20% for Android. One might think Android would command a much bigger share of browser use the way journalists keep trumpeting the growth in market share for the platform. I suppose it's just as bad for Rim and Nokia: lots of devices that prevent users from a good Internet experience.
        Again, thank you.

  • russell

    @Horace/group

    have been waitng for discussion along these lines to confirm what i'm starting to suspect as this current tech cycle unfolds. Each of the previous cycles have produced leaders(say top 5) whose market caps exceed the previous with consistency. This one has unique characteristics (good or bad?) in that its more global in its impact and being driven from the consumer side initially before entering the enterprise.

    My bet is that the eventual top five leaders will exceeed any of the previous top five in market cap as has happened with each each previous cycles. The difference perhaps is that a more of the leaders on the short list will probably be from somewhere other than the U.S., and it could take longer since adoption involves emerging and developed countries.

    Also, since some of the likeley current leaders are relunctant to go public for any number of reason, maybe we'll have a private company on the shortlist this time around. One things for sure, this one is not like any of the others.

    Would like to hear what the group thinks of this view.

    • http://www.asymco.com Horace Dediu

      If history is any guide, the companies which will emerge with massive valuations will be ones we've never heard of.

      In the 70s and 80s these were brand new companies that came to dominate their industries at the detriment of those that came before:
      Kodak, most Japanese consumer electronics, Ford, Merrill Lynch, Xerox

      In the 90s is was: Toyota, Wal-Mart, Intel, Southwest, Microsoft, Oracle, Cisco, Sony, Bloomberg, Best Buy

      Last decade: Apple, RIM, Salesforce.com, Google, Amazon, eBay

      Few of these companies were considered "threats" or even challengers a short time before they became dominant.

      I don't think the mix of US/non-US will be a defining characteristic of a new wave of entrants. What matters most is wrapping new business models around new technology.

    • berult

      One central determining factor in the nature of future cycles, and the width of their playing fields, will, I suspect, be the phenomenal, accelerating rate of change in producing new technologies, and the seamless integration of those into the borderless consuming sphere.

      However, nothing is a given. An unforeseen event, an inflection point of the unpredictable variety, an arbitrary levy on the scare-inducing autonomy and anatomy of change, all can and will reverse the sphere's polarity in the blink of a prognosticator's eye.

      We're on tenuous shifting grounds of uncertainty. That makes it all exhilarating but nonetheless, rather short lasting. In the tautological domain of probabilistic predictability, the next cycle will carry a yeoman's pay day, but in a somewhat more of a hurry.

  • vangrieg

    Speaking of business models, Google's valuation seems to completely ignore Android. This annoys Schmidt, judging by his last interview with WSJ, but so far all that came from Google was a parable of a billion Android devices bringing home 10 dollars a year on average. My gut feeling tells me that Android is one hell of an expensive way to buy mobile traffic (especially with the possibility that they are paying for being the default engine on their own OS). I'm too lazy to do any real research on this, however. But if somebody uncovered the business part of Google's model (providing it exists), it would be quite a hit on the Internet I guess.

    • Gandhi

      Outside of marketing-speak, there is scant hard data out there on Android business case. My impression is that Google in particular, and other tech competitors in general, are caught so far off guard that they just want to throw something out there with the hope to slow Apple down. More and more, it looks like Jobs was serious when he said Apple has a 5-year lead on the competition when it comes to touch computing. Apple seems to have had a tablet cooking for a very long time, but released it on the iPhone first. No one saw it coming, and admittedly, the first version was quite rough compared to what it is today. But it was so far ahead of the competition, the rough edges were not that big an issue.

      Competitors reacted to the iPhone and (Google in particular) to put out Android. Except it is clear Google has not planned this through. From the fragmented Android marketplace, uneven OS updates, to the patent lawsuit, to telcos cutting out Google wholesale in many ways, to China just taking Android and rolling their own version, I just don't see how Android can be a commercial success long term – at least not for Google. While pundits argue Android growth is hurting Apple, I think Android success is because Microsoft was asleep at the wheel when it comes to touch computing, and the hardware makers wanted something, anything, to compete against Apple. While it remains to be seen how long before (and if) Microsoft can pose a serious challenge to iOS, I suspect Microsoft will be able to catch up to to Android, simply because Microsoft is going to come to the market with a much more coherent strategy, which will bode well for the WinPh7 system long term. And you can be sure Microsoft will have the legal issues sorted out and stand behind its OS in case of lawsuits.

      The other problem with Android is that Google was in such a hurry to compete against the iPhone that they did not consider future expandability. Android has no answer to the iPad. Even RIMM does not have an answer to the iPad and has announced that they will use an OS developed by a recently acquired company. Google never planned the iOS to be on a bigger screen. And here as well you see the lack of control Google has over Android. Despite Google's repeated assertions the Android is not made for tablets, device makers like Dell and Samsung are still trying to shoehorn it in. Because iPad is just killing everything out there, and competitors have no answer. May be Chrome OS might be the answer. But who knows what exactly Chrome OS is supposed to be doing. It was initially announced as a Windows PC competitor. I suspect the release of the iPad has forced Google to go back to the drawing board.

      With all of this uncertainty around Android, how does this affect the end-user experience? The consumer is fickle. In this consumer-driven touch computing revolution, do you think the user is going to tolerate these frustrations? Do you think the consumer will spend money buying Android apps when they are not sure the apps will work from one device to the next – or heck, even one OS version to the next? You know an iOS app will work with the iPod Touch, iPad, iPhone, (and soon, I bet) AppleTV.

      I suspect Microsoft will follow a similar tact and keep better control on the Apps store. Android will become the PC of the smartphone world. And in a consumer-driven market, that is not a reputation to have.

      It is clear in the markets outside the US where the iPhone is sold on multiple carriers, Android has not gained much traction. All Apple has to do to cut Android's US growth out from under it is release the iPhone here in the US on Sprint and T-Mobile, and Android will eventually get relegated to third or fourth place in smartphones.

      • Rhadamanthys

        Android will become the PC of the smartphone world.

        No, it's going to be like the Unix wars of the late 1980s, with each OEM/Carrier producing its own version of Android, each on paper compatible with the other versions, but in practice not so much compatible at all.

      • Gandhi

        I meant "PC" in the marketing sense, not technical sense. As in, a compromise OS that does more to get in your way than to help you accomplish your task.

      • Anonymous

        Reading this on Jan 31st 2012.  Boy did you nail it back when you wrote that.  

  • Iphoned

    >>ultra-large market caps are reserved for companies that are past their prime.

    I think this has been universally true until now, and for obvious reasons. It seems Apple would the first example to the contrary, just based on the market position of its current products.

  • Iphoned

    Why isn't Google on this chart?

    Google's 5yr EPS growth is same as Apple's – up 4x from 2005 to 2009. MC is about 180b, and PE is about same.

    This will make Apple not look so alone on the chart in the upper left as it looks now.

    • http://www.asymco.com Horace Dediu

      Google is not one of the top ten market caps traded on US exchanges. I will try to do a similar chart for top ten tech companies.

  • Iphoned

    Although I am a big fan of and long Apple, one should point out that the seemingly unsual PE vs past growth as compared to the other companies on the chard does have its basis in solid reason. It may prove to be wrong, but that doesn’t mean that it unreasonable.

    Without pointing out the following, the charts make a good, but a somewhat simplistic case.

    Clearly the market is correctly assessing the earnings of the other large companies on the chart as “normal” and thus more predictable going forward. This is with good reason given the nature of these companies.

    Apples’ current earnings and growth is based on brand new products subject to competition and supply constraints. Clearly the market is assessing that these as possibly peak earnings. One can clearly see this PE compression with cyclical companies, or commodity suppliers ones operating in an environment of contstrained demand.

    I am not saying that Apples’ will indeed prove to be peak earnings, there are good arguments also to the contrary given Apples’ unique track record, but the possibility can not be simply discounted.

  • Bill Kunz

    What were the other websites we should look at re: aapl?
    Thanks,
    Bill Kunz

  • Jbelkin

    The pe ratio is also not literally apples to apples as apple has a cash pile of 25-45 billion depending on accounting …

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  • HD Boy

    There's another huge, untapped market that Apple also could waltz in and take over with a 6- or 7-inch iPad — car audio. This is the display size of industrty standard, Double-DIN vehicle head units (radio/CD/DVD/NAV).

    It's an expensive nightmare to add iPods/iPhones to pre-2005 vehicles ($200-$1,800) because whole new head units often are needed (or easier) to install. New vehicles already have iPod/iPhone interfaces, but connecting them to those head units still results in an unsatisfying, hybrid interface experience that largely bypasses the brilliant look-and-feel of Apple's touchscreen devices.

    If Apple ever decides to go after vehicle head units and docks, watch out!

    • Gandhi

      I think ubiquitous internet access needs to be available for that to occur. Microsoft is already doing this with the Sync platform, but the major thing holding these cars back is not being able to access the cloud. There is some limited functionality with satellite radio (real time traffic, Zagat guides), but I do not want to sign up for another monthly subscription. Ideally, I would like one data/internet access plan, where all my devices can use to get to the cloud – iPhone, iPad, navigation system on cars, and laptop.

      Alas, the telcos will never permit this.

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