Apple Marvel: Part 2. Is $1 trillion capitalization possible?

In my previous post Apple Marvel: Part 1, I wrote some thoughts on the situation with Apple stock price. Now, I’ll continue analyzing it.

First of all, it seems a waste of time to try to build any complex models to predict stock price of Apple. In fact, it seems like no exact model can be built, just because this situation is quite unique. However, it may be possible to get a general idea on the future stock price behavior from analysis of the markets, similar companies and historical events.

Rising revenues - are portable devices and emerging markets the cause?


In October 2011, Apple Inc. reported enormous revenues. Detailed information about every aspect of its business can be found in Apple’s Form 10-K, as usually, but in a few words, total net sales increased by 66% to more than $108 billion, and net income reached $25 billion, 78% rise from 2010. The structure of net sales shows that almost half of total sales (43%) were produced by iPhone. Mac and iPad sales both produced about $20 billion, or 20% and 19% respectively.

Another important facts include these:

• iPhone sales represent 87% increase compared to 2010;
• iPad sales increased by 311%;
• Mac sales increased by 25%.

What about segment operating performance?

Well, the sales in Europe and Americas increased by 49% and 56% respectively, Japan sales represent 37% increase (figures would be higher if there was no earthquake), and 174% increase in sales in Asia-Pacific region (mainly because increasing sales in Greater China).

While all these numbers can be interesting and impressive, there are some certain conclusions that can be drawn from it. First of all, mobile products are becoming incredibly important for Apple. In 2007 there was no such thing as iPhone, iPad appeared even later, in 2010, yet now they generate more than 60% of the revenue. Secondly, if Apple hopes to increase its sales at the same rate, it will have to focus on emerging markets, such as China and South America.

"Perfect" markets and corporate wars.

These are the facts. Now let's look at potential problems. The major ones include rising competition, dependence from mobile products' sales and patent war started by Apple.

 It is impossible to get the sales increased by 50% every year without new customers. And while there are millions of loyal customers in Europe and North America, it seems unlikely that much more people will start buying Apple production there, just because virtually everybody who wanted to buy it has already become a client. In the meantime, the opposite is quite possible. Google Android, on which Steve Jobs spent so much time trying to destroy it, is becoming more and more popular. Moreover, Windows Phone 7 does its best to gain its place under the sun, and Windows 8, optimized for tablets, will be released till the end of the year.

Of course, there are also emerging markets, Greater China being the most important of them, where Apple can increase sales multiply. But there can be some challenges too. While China becomes more and more powerful player on the world arena, the majority of its population is still quite poor. Apple products are not very cheap, especially in comparison with Android-based devices that usually cost less than $150, both phones and tablets. Of course, they are not nearly as good as iPhone or iPad, but many people who can't buy Apple products will prefer them, thus strengthening Google positions on these markets.

And there is the third problem - corporate patent war, started by Apple. While the statement that this process was started by Apple may be not completely true, it's obvious that before Steve Jobs declared that he would do anything to destroy Android, the problem of corporations spending millions of dollars in law courts and then billions in fines was much smaller on the scale. The current patent system proved its failure years ago, but now it works like a disincentive, slowing down the production of new devices and complicating corpotation's work, not to talk about consumers being unable to buy certain products in their own countries. The main problem of Apple, as it was sagely stated in a new article in Businessweek, Apple's War on Android, is that it has only one phone model and one tablet model, and if one day some company will manage to proof that Apple violated their patents, the consequences for Apple will be disastrous.

So, what's the conclusion?

While it is possible for Apple to increase sales significantly for a few more years, it seems unlikely that such fantastic growth can last for long. The most popular company in the world simply can't become even more popular.

Will the stock price rise further when the revenue will stabilize at some point? Well, it's possible. In the markets' history there were such examples, besides current financial multipliers of Apple are not high enough to make the growth unlikely. I will pay attention to this "part of the problem" in the third and the last post on this topic. Then, with all three parts brought together, it may become possible to give an answer to the question stated in the header.