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Outside the Box
May 9, 2011, 10:26 a.m. EDT
By James Altucher
NEW YORK (MarketWatch) "” I did a video the other day where I made a big mistake. I said Apple was going to be the world's first trillion dollar company. When I was walking home late that night some homeless guy yelled at me from the gutter, "Hey, loser, why stop there? Why not say Apple is going to be the world's first $2 trillion company?"
And that sounds about right.
Apple /quotes/comstock/15*!aapl/quotes/nls/aapl AAPL +0.41% will be the world's first $2 trillion company. Right now, the market values Apple at $323 billion.
People are afraid of the word "trillion." Just like 50 years ago, when J. Paul Getty famously said, "a billion dollars isn't worth what it used to be." He was so insensitive to the many people who had just found themselves emerged from the Great Depression for the first time in 20 years and now, his recipe for happiness was not only just a white picket fence, a clean pair of pants, a college degree, but even a billion dollars wouldn't quite satisfy the hunger of the masses and never would.
We couldn't even understand what a billion dollars was. How could one spend that? Now we've seen not only how one could spend that (many times over) but how one could steal it when Bernie Madoff took somewhere in the vicinity of $60 billion.
But before someone steals a trillion, they first have to make a trillion. Or two. Because if you can make one, you can make two. And Apple will do it quickly.
First, I've written about this before but the basic math is easy. Read my previous column on why Apple is worth $1 trillion.
The basic math: Last quarter, Apple's earnings growth was about 90% year-over-year. That means, according to many common theories of how you value a company, that it's not unreasonable for Apple to trade for 90 times earnings. In the past 12 months the company earned $20 billion. Ninety times that is $1.8 trillion. We know they are going to grow earnings. Heck, they might grow 90% again. That might even imply a $3 trillion market capitalization.
Oh my gosh, what an idiot, you might be thinking to yourself. And, in that case, you're right. I'm not always the brightest guy. I should probably spend more time with my daughters, for instance. I should've invested in the company that generated 99% of Google's earnings when I had the chance. I've done lots of stupid things. Read 10 unusual things about Google.
But all of that aside. The way I'm valuing Apple right now is not much different than how many other analysts would value Apple. And, by the way, I just got you to a $3 trillion level. We just skipped right over the $2 trillion level.
So, now I'll take some questions from the audience:
A) Doesn't this sound like a bubble to you? Every car in the world needs gas, for instance, so why won't Exxon /quotes/comstock/13*!xom/quotes/nls/xom XOM +0.83% won't be the world's first trillion dollar company? Or isn't this like the Internet bubble when Cisco /quotes/comstock/15*!csco/quotes/nls/csco CSCO +0.46% was the world's largest company for a split second in time?
That's really three questions and the answers are No, No, No. Exxon and Cisco sell one product. Exxon sells oil. Cisco sold (primarily at the peak of the Internet bubble) routers. Apple is selling (and growing sales in) high-margin items like computers, phones, music, tablets, games, videos, etc. They are the leader in several different industries. Harder to topple from the king's throne.
B) Isn't Steve Jobs going to die soon? Won't that crash the stock? No, not at all. Jobs is the innovative force who came up with the ideas for the iPod, the iPad, the iPhone, even the Macintosh, but all of those ideas were started many years ago. Tim Cook, the acting CEO while Jobs is on leave, has been dealing with all the manufacturing and inventory issues and has been doing an excellent job (far better than the non-detail-oriented Jobs would) at keeping up with the enormous demand for Apple products. If anything Apple has too much of a "death discount" in it right now because of the fear that any moment could be Jobs's last. Read 10 unusual things you didn't know about Steve Jobs.
C) Is Apple just a retail fad? Is this just a stock for retail investors? Well, tell that to George Soros, who bought 37,000 shares of Apple last quarter (along with 860,000 shares of Oracle /quotes/comstock/15*!orcl/quotes/nls/orcl ORCL +1.46% , 10 million shares of Citigroup /quotes/comstock/13*!c/quotes/nls/c C -2.41% , and 2.5 million shares of Ford /quotes/comstock/13*!f/quotes/nls/f F -0.32% ). Or tell that to top hedge-fund manager Stevie Cohen, who bought slightly more than 500,000 shares of Apple last quarter, making it a slightly bigger position for him than his enormous position in Dendreon /quotes/comstock/15*!dndn/quotes/nls/dndn DNDN +0.84% . Or fellow billionaire Ken Griffin, who bought 2.5 million shares of Apple last quarter. These three billionaires are buying shares of Apple. If you ran into these billionaires at a cocktail party and they told you Apple was going to be worth a trillion dollars, would you argue with them?
Ben Bernanke is doing what I call "the iPad stimulus." A year ago we didn't know what "QE2" was and nobody had an iPad. Now 30 million people have iPads and Bernanke has printed up an extra trillion dollars in this economy. Bubble or not, Apple is going up. The basic math is there, the growth is in place, the product lines are continuing to do well, and all of the smart money is buying. The race is on but I think Apple will be the clear winner when it becomes the $2 trillion king.
James Altucher manages Formula Capital, an alternative asset management firm. He holds no positions in Apple shares.
"Apple will be the world's first $2 trillion company http://bit.ly/mkzmUG" 1:26 p.m. EDT, May 9, 2011 from MarketWatch
"#Oil rebounds above $100, #gasoline up 5% http://bit.ly/mQCLnW" 12:59 p.m. EDT, May 9, 2011 from MarketWatch
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"RT @MWRadio: Used-car prices are breaking records, that means buyers are netting better deals on trade-ins and leases http://bit.ly/iS4MNs" 12:24 p.m. EDT, May 9, 2011 from MarketWatch
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