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

Various members of the NetNet crew are in and out this vacation and snow-filled week, so we've asked a few friends to fill in. The following is from hedge fund manager and financial columnist James Altucher ...

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.

Steve Jobs
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Steve Jobs

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.

iPad
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iPad

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.

Read more from Altucher on his blogThe Altucher Confidential

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