Why Apple Will Be The First Company to Reach a Trillion Dollar Market Cap

CNBC ^ | December 30, 2010

[Swordmaker]

Apple is the dream company we always wished for when we were children. The messiah of companies that we never thought would come to Earth in our lifetimes.

Getty Images

Steve Jobs

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When I was a kid the only thing I wanted in life was an Apple II+. When I finally got one, (my dad took one from his work and gave it to me for about six months) I did everything a young boy does with his computer.

I programmed (in BASIC) the computer to type my name over and over again. I then went to the local computer store and shoplifted Ultima III. My friends and I then copied each others games so we had a whole set of games to play with. I then skipped school incessantly in order to play games all day, my friends and I calling each other throughout the day (we all skipped school every day) in order to share the latest secrets we found while hacking our way through Castle Wolfenstein.

Fifteen years later Apple was on the verge of bankruptcy. The company I worked for (HBO) and Philip Morris, the cigarette company, were the only two companies in the city that I knew of that used primarily Macintoshes (except for the legal department, which used all PCs and every document was redlined, outlined, greenlit, in WordPerfect 7.1.1).

Gil Amelio, the CEO of the company for about 3 seconds came to visit HBO. We were all so impressed with him. The CEO of Apple! How much cooler could you get? At the time they were about this close from bankruptcy or being, at the very least, hopelessly inconsequential.

Five years before that was the Apple Newton. The head of Carnegie Mellon’s Art school said to me, “this will change the world.” And five years before that, I wrote my first term paper on this amazing little device, the Mac 512k. I also saw Steve Jobs when he visited Cornell’s Computer Science Department to get them to buy some NEXT machines. They were beautiful. Maybe still the most beautiful desktop machines I’ve ever seen.

Black cubes, super powerful. They were magic to program and experiment with. I wrote a chess program on them. Everyone surrounded Steve Jobs just to see what he looked like. I was jealous. He was young, rich, and had so much charisma you couldn’t even see past the light that shined out of him.

Getty Images

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Now, I’m writing this on my last Windows-based laptop ever. I know what's going to happen. Already in my house there’s one Macbook Air. There are two IPod Touches, one iPhone, two iPads, and four or five iPods. I’ve got 10 authorized computers already for iTunes across two accounts. I download apps at least once per day, much more if you add in songs, TV shows and movies from the iTunes store. Within two weeks, before I leave on a trip for India, I will buy a Macbook Air 13” to travel with, and I know I will never go back to the HP laptops I’ve been using for almost the past 10 years.

Now lets look at the basic numbers.

• This year iPad sales will probably end up being somewhere between 10 million and 12 million (they were 7.5 million at the end of last quarter.) Apple has about 40 percent gross margin on iPad sales

• iPad has about 30 percent gross margin on app sales and 10 percent margin on song sales. They are selling up to 30 million apps a day.

• Assume iPad is going to sell 50 million iPads next year (I’ve seen estimates ranging from 43 million to 65 million). That’s at least four times as many iPads. Lets say they only grow two times per year for the two years after that (new models, more availability worldwide, etc). That’s 200 million iPads in 2013, or 15 to 20 times what they did in 2010. Two-hundred million iPads with a 30 percent margin (currently margins on iPads are about 36 percent, but I assume they will go down) is about $30 billion in gross profits.

• Assume 100 million app sales a day. Each app, on average, is about 30 cents They get 30 percent margins on an app, or about 9 cents per app. That’s $9 million in gross profits per day or about $3.5 billion per year in gross profits on app sales in 2013. Already we are at $35 billion in gross profits and that’s without counting iPhone sales, iPod sales, song sales (also about 10 cent margin per song), video sales, and of course, Mac sales.

• You can’t even really make a calculation on everything else. The last few quarters: profits, Mac sales, iPod Touch sales, iPhone sales, all reached all time highs. Mac (which analysts originally thought might be cannibalized by the iPad) sales achieved double-digit growth in every worldwide market.

• Next year the iPhone will be available on Verizon so will blow past all estimates

• One can go on and on with the metrics of how Apple blows it away but lets just say that in 2013, iPad and app sales represent about 40 percent of Apple’s gross profits. Total gross profits could be about $80 billion (today is $25 billion). Cash flow could be about 75 percent of that (like it is today), or about $60 billion. Slap a 20 times multiple on that and you have a market cap of $1.2 trillion. That’s a shareprice of about $1200 by 2013.

We can try and model everything: Mac sales, iPod Touch sales, song sales, margins, etc. But even back of the envelope using current growth of the iPad and the app store, we can easily make a rationale for a trillion dollar market cap. The fact that iPad sales, rather than cannibalizing the Mac, has actually increased Mac sales further increases the argument. The day my dad had to take away my Apple II+, I cried. I have a 30 year relationship with Apple. I love it. I don’t think I have a real relationship with any other company on the planet. That’s why its going to be a trillion dollar market cap.

[stripes1776]

Apple's products, whatever the category, will continue to rule until the markets catch up with them in any of their currently successful categories.

Your prediction assumes that Apple is finished coming out with innovative products. And other companies just have to copy Apple and then Apple's share will drop. But I think there is a huge problem with the assumption that Apple is finished innovating.

The next time you go to a news stand, you might want to look at the current issue of "Mac|Life" to see where Apple might be headed in the future with game-changing gadgets. They develop stuff for years in their labs before the public sees any products.

[bannie]

So...if a school wanted to quit using print texts and move to electronic textbooks and library books, which one—at this time—would work the best for the money?

:-)

[the invisib1e hand]

im not reading this. however, Apple Computer is on top of the information age. Not the grimy sh!t, but the actually making a product that is useful, fun, and high quality.

And Steve Jobs' stand on pornography made me a customer.

I just wish he'd take a similar stand on the business of pimping people's personal info.

Mr. Jobs, privacy is a basic human right.

[The_Reader_David]

I remind both of you that Rush Limbaugh is standardized on Macs.

[AFreeBird]

Well, about a month after I got my mini, they came out with a redesigned version. Still, the thing is easy as pie to set up. I got the HDMI adapter for mine, although I believe that’s no longer required as the new model has a mini HDMI out connector built in. Audio is run to my old JVC home theater via a Belkin Bluetooth adapter hooked into the tape jack on the JVC. I could do an optical out (it’s a dual jack on the mini - headphone style or digital optical) to the home theater, but it, the JVC, only has one optical in, and it’s used for the Sat DVR. I really need to upgrade the home theater box.

Keyboard and mouse are Bluetooth. Since the Dish ViP722 has Ethernet connectivity, I’m planning on bridging it to my wireless network via the mini.

I never thought I’d end up having a 52” HD monitor connected to a computer, but there I am. For $8 a month for Netflix streaming, it’s a steal for movie and TV entertainment. I can use my iPhone (and you could use your iPod touch) as a remote control via a number of different software apps. Logitech has a free app, and corresponding server side software that works really well. The apple remote software only works with a limited number of programs, itunes is best. But the logitech stuff can replace both the keyboard and mouse for entertainment purposes.

As for cost, my mini was $699. The apple store will have up to date pricing and configuration options.

[Eaker]

I thought your care provider had left you alone...

LOL!

[Eaker]

I remind both of you that Rush Limbaugh is standardized on Macs.

And Oxycontin.

[AFreeBird]

I can print to my Canon MX850 just fine with my iPad running iOS 4.2x. Now I did have to download some OSX developer drivers that Apple took out of the public version of 10.6 x. The rumor is that a patent troll got after them and they pulled those drivers at the last minute.

I expect that issue to be resolved in a future release of OSX. I cant imagine Steve is happy about it.

[AFreeBird]

Some jokes are a bit tasteless, especially w/out a correspond /s tag.

[adorno]

They develop stuff for years in their labs before the public sees any products.

You assume that Microsoft and HP and Dell and Google and IBM and Toshiba and Samsung and Motorola and all other technology companies aren't also doing things in their labs which will counter or preempt anything that Apple might be doing.

Where, for example, is Apple's equivalent to the XBox360, or Apple's equivalent to the Kinect or Apple's equivalent to Bing or Google search? Now, in every category where Apple made big news in the last 3 or 4 years, like the iPhones and iPads, there were, soon after, competitors from any different sources. Apple cannot seem to make anything that is "exclusively" theirs for a long time.

Now, how was Apple "inventive" or "innovative" when all that they did was to take a couple of mousetraps and create better mousetraps? I mean, weren't there smartphones before the iPhone came along, and weren't there tablets before the iPad came along.

It seems like you're one of those that is so blinded by your love for anything Apple, that you're not looking at the real facts.

[AFreeBird]

Yea, there were rudimentary smart phones and tablets. Then Apple came around and redefined those terms.

[PhilosopherStone1000]

Sorry. My bad. I generally don’t click on these threads. And I have a cousin who does a lot of the audio work for Apple (iPhone, iPod). But living in the Bay Area, my general impression of Apple users is the one I gave.

Maybe in other parts of the country it’s different.

[RegulatorCountry]

The Ipad is a great gadget, but Ipad will be toast once some quality Droid pads come out. Users have to buy an addon application just to be able to print with Ipad.

... and what do you have to buy to be able to print on a vaporware tablet? Unicorns?

[stripes1776]

You assume that Microsoft and HP and Dell and Google and IBM and Toshiba and Samsung and Motorola and all other technology companies aren't also doing things in their labs which will counter or preempt anything that Apple might be doing.

I have not doubt that all of those companies are doing research. But why was Apple first with the iPhone, the multi-touch smart phone? Why does Apple dominate in music sales and playback with the iPod and now the iPod touch?

Where, for example, is Apple's equivalent to the XBox360, or Apple's equivalent to the Kinect or Apple's equivalent to Bing or Google search?

Well, Google wasn't the first with search. I remember when Alta Vista dominated, then Yahoo. But Google did search so well, they now dominate. Microsoft is copying with Bing. But it's now clear yet how much of the market MS will get. Search is not part of Apple's game plan.

Now, in every category where Apple made big news in the last 3 or 4 years, like the iPhones and iPads, there were, soon after, competitors from any different sources. Apple cannot seem to make anything that is "exclusively" theirs for a long time.

Exactly. Apple leads and then everyone else copies. Why are all those other companies bringing out multi-touch smart phones in imitation of the iPhone? Can't those other companies come up with their own innovations rather than copying the successes of Apple?

Now, how was Apple "inventive" or "innovative" when all that they did was to take a couple of mousetraps and create better mousetraps?

The sales figures tell the story. Apple pays a lot of attention of user interfaces and ease of use. Apple did it right. And now a lot of companies are copying Apple's success.

I mean, weren't there smartphones before the iPhone came along, and weren't there tablets before the iPad came along.

You claim to be interested in the facts. The sales figures are the facts. The iPhone has been a huge success, generating huge profits for Apples. The same is true for the iPad. Look at the sales figures. There are the facts you are looking for.

It seems like you're one of those that is so blinded by your love for anything Apple, that you're not looking at the real facts.

I an presenting the facts. Where are your facts? Please present some facts rather than express your extreme hatred which blinds you to the facts--sales figures and profits.

[adorno]

Yea, there were rudimentary smart phones and tablets. Then Apple came around and redefined those terms.

So, the blackberries and the WindowsMobile phones were rudimentary? And, every tablet before the iPad was rudimentary?

You're so immersed into the Apple hype that you're not even bothering to think about what you're saying?

Apparently, to you, upgrading a gadget to a modern version is the same as "redefining". But, even you are calling it a "redefinition" and not really an "innovation". If we were to follow your examples, every time an OS is upgraded, the OS markets are being redefined. And, every time Intel comes up with a new cpu design, the company is redefining the computer field.

Get a grip with your Apple exaggerations. You've bought too much of the apply hype.

[Behemothpanzer]

iPod launched Oct 23, 2001 - 9 years ago.

Most recent data I could easily find was for September of 2009 when iPod had a 73.8% market share.

That’s almost a decade for the industry to catch up and they’re nowhere close.

iPhone launched Jan 9, 2007 and as of this summer had a 28% market share, trailing only BlackBerry in the smartphone category.

iPad has a deadly 95.5% market share. Clearly, it’s the first out of the gate, but don’t underestimate that importance. iPod was, essentially, the first of the digital music players and it’s dominance is unmatched.

[jimbo123]

[adorno]

I an presenting the facts. Where are your facts?

I already gave you the facts, but you conveniently spun your way around them.

Apple was not innovative; they just took currently existing products and upgraded them to more current technology, all of which was and is available to other manufacturers. Being first or modernizing a product does not equal long-term success or exclusivity in the markets.

Where the iPhone was the "it thing" for a couple of years, the Android phones came along and started to take the lead, and now, even Microsoft, with WM7, is expected to, in the long run, to make the iPhone into an also-ran. The same thing will happen with the iPad when everybody else is trying to turn tablets into full-powered computers, and in the same form factor, with long battery life, low cost, low weight, and full OSes. The iPad will turn into a dud in a couple of years.

If sales percentages were to be permanently static, then Apple would be the long-term winner in the areas where you claim they "innovated". And, if market-cap were to be permanently keeping Apple in the lead in the technology sector, then even I would buy Apple stock. But, reality is quite different and, whoever is on top today could be on the bottom tomorrow. Life's bitch and then reality hits.

[USNBandit]

They released Win7, which was an updated version of Vista that didn’t suck as bad, but with no real value added.

Wait, are you trying to say that you don't think $100 is a fair price to replace the totally non-functional OS with one that can "snap" the windows to the margins? :)

One of my coworkers commented on me paying the MacTax, by spending more for a Mac than my old Windows laptop. My "old" windows laptop was a middle of the road HP, $800, a dual processor, about 6+ lbs, 2 hour battery, 2 1/2 years old. It came with Vista which after the first couple months took so long to boot up that I would avoid shutting it down. Even at its best it would take several minutes to get to the point where you could actually do something on it. I finally replaced Vista with 7, not because I thought 7 would be awesome, but because Vista was such a flying piece of excrement. 7 was much more stable, but it still ran slow, and took forever to boot up.

My "MacTax" was an extra $500 for a $1300 MacBook Air. It is a two pound, seven hour battery, aluminum chassis, awesome machine that boots in 14 seconds. That isn't 14 seconds to see the desktop and then stare at is for a couple minutes while it becomes useable. That is 14 seconds from cold iron, push the on button, ready to work. Oh, it also doesn't dump the relationship with the wifi printer every time I shut the thing off.

[MCH]