The Case for a Trillion-Dollar Apple

04/06/2012 10:45 am EST


Bullish analysts say the  key smartphone market will be dominated by iPhone and competing Android devices—and then there's Apple TV, writes Simon Avery of The Globe and Mail.

Apple euphoria has hit a new high, with some analysts forecasting that Apple (AAPL) is on the way to becoming the world's first trillion-dollar company, at the expense of Research In Motion (RIMM) and other competitors.

Within the next two years, Apple's share price will likely hit $1,000, a 62% increase from the current level, two analysts said this week.

"There will be enough value over the next two-plus years for Apple to add another $400 billion in market cap," said Piper Jaffray's Gene Munster, a veteran analyst of the tech sector who has covered Apple since 2001. During the same period, RIM is likely to continue to lose market share and become increasingly "irrelevant," he said.

Apple has seen its market value rocket from less than $120 billion in 2008 to $575 billion today. In fact, Munster estimates that 85% of the increase in market value of the entire US tech sector since 2008 has come from Apple.

Much of its gains have come at the expense of its rivals. While Apple has added more than $400 billion in market cap over the past four years, six of the company's direct competitors, including RIM, Microsoft (MSFT), and Nokia (NOK), have lost a total of $400 billion in market cap.

In the next two years, half of the growth in Apple's market cap will come from new investor dollars flowing into technology, and half will come from investors shifting money away from competitors, Munster forecasts.

Microsoft holds bragging rights to attaining the highest market value ever reached by a public company in the West, striking $619 billion in December 1999. Today, however, the world's largest software player is valued at $271.6 billion, compared with $575 billion for Apple.

The gyrations in tech valuations over the years, together with some notoriously wrong stock forecasts by analysts, have left many investors doubting the Street's latest enthusiasm. Joshua Brown, a New York-based investment advisor and blogger who owns Apple stock, responded that "$1,000 targets, 'trillion-dollar calls' and the like just smack of gimmickry."

But Munster said he has been following the sector for years, and has a good sense of how the market for Apple products is playing out.

"I wouldn't be doing this if I didn't have a high level of confidence this was going to happen," he said in an interview. "It's time to just tell people how we really feel this thing is going to play out."

Specifically, Munster sees sales of iPhones and iPads accelerating at the expense of competitors' devices. A recent survey by his firm found that 94% of iPhone owners in the US plan to make their next device an iPhone too.

The smartphone market is boiling down to essentially two large players: Samsung Electronics (running Google's (GOOG)Android software) and Apple. The two-horse race will push RIM out of business within two to four years, and the BlackBerry maker's extensive patent portfolio will end up acquired by another company, Munster said.

On Tuesday, he put a 12-month price target on Apple's stock of $910, based on 14-times expected earnings. For the following year, using a multiple of just 12-times forecasted earnings, the stock should hit $960, and the advent of an Apple television in 2013 should provide enough additional profit to push the shares past $1,000, he said.

Although Apple is thought to have encountered tough negotiations with content providers, analysts remain excited about the potential of an Apple TV, given how successful the company's most recent product launches have proved. The iPad, which was introduced in April 2010, accounted for 20% of the company's revenue last quarter, compared with 17% in the year-earlier period.

However, it is the iPhone which is really driving the success of the Cupertino, Calif.-based company. Smartphones and related products and services accounted for just over half of sales last quarter, up from 39% one year earlier.

And while sales of Apple's traditional Mac desktop and laptop computers continue to increase, the devices increasingly comprise a smaller overall total of the company's revenue. Macs contributed 14% of sales last quarter, compared with 20% in the year-earlier period.

On Monday, another analyst published a report predicting that Apple's share price would hit $1,001 within 12 months. Brian White officially became the most bullish analyst following Apple with his first report on the company for Topeka Capital Markets.

White also pointed to Apple's expected TV device as a catalyst for further value. In addition, he said Asia's largest wireless operator, China Mobile (CHL), would begin carrying the iPhone within a year, potentially adding millions of new Apple customers.

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