Apple Passes Google's Stock Price

By Stephen D. Simpson, CFA | April 12, 2012 AAA
Apple Passes Google's Stock Price

It's hard to run out of superlatives when it comes to Apple, as this consumer tech company continues to rewrite the rules about what companies can achieve. The latest target in sight? Overtaking Google when it comes to the magnitude of its stock quotation.

Are Stock Prices Really Relevant?
Some readers will immediately argue that stock prices are trivial; that it's market capitalization and enterprise value that investors should follow. Certainly that's a valid point; while Apple is closing in on Google's share price, Apple long ago surpassed Google in market value, and boasts an enterprise value more than three times the size of Google.

To that end, Apple is already in rarefied air. Not only is Apple currently the only half-trillion dollar company in the United States, it has long passed Exxon Mobil, Microsoft and IBM. The last time a tech sector achieved that was in the late '90s, when competitor Microsoft reached around $619 billion.

To be more precise, though, Apple may not be the most valuable company in the world. Saudi Aramco is the national oil company of Saudi Arabia and basically monopolizes the production of oil and other petroleum products in the country with the world's largest reserves and first- or second-largest production numbers. The Saudis are famously close-lipped about Aramco, but there have been estimates that the company's value can be measured in the trillions.

Large Prices, Small Investors
There is, however, at least one perspective from which stock prices are still relevant. In the past, investors were charged punitive premiums by brokers for odd lots – buying nine or 10 shares of a stock actually cost more (sometimes significantly more) than a round lot of 100 shares – and/or subjected investors to unfavorable bid/ask spreads.

Much of that has disappeared now, but the psychology still seems to be in place for retail investors. While institutions analyze positions in terms of dollar volume liquidity (share price times average volume), retail investors still seem to favor lower-priced stocks – perhaps not only because they can buy a larger number of shares (and it is still difficult, if not impossible, to buy fractional shares), but also because of the impression that low-priced stocks are more likely to deliver outsized gains.

How Do High-Value Companies Fare?
The record on stocks with gaudy prices and market capitalizations is decidedly mixed. Berkshire Hathaway is a famous example of a company that has never split its stock, and the recent price of $119,000 certainly reflects that. Has this hurt the company? Warren Buffett is rather famous for being indifferent as to whether investors own his stock and I'm certain that many investors who would want to own stock have previously been unable to do so, because they couldn't muster the resources to buy even one share.

Even Warren Buffett had to bend to this reality, and he created a separate share class to not only make ownership and disposition of shares easier, but also to preempt other investors from buying Berkshire stock and creating trusts (similar to how ETFs allow investors to buy gold at prices well below the per-ounce price).

Similarly, while a high stock price has not hurt Apple, Google or Intuitive Surgical, it does increasingly put these shares out of reach for ordinary retail investors – arguably not a pressing concern for management when institutions so thoroughly dominate investing.

There are a few cases, though, where sky-high prices marked a frenzy for the companies in question. Prior to two stock splits and the post-2000 tech collapse, Qualcomm reached even higher levels than Apple's current price, closing 1999 at over $650 a share. Likewise, amidst the Internet/tech frenzy of that era, other well-known names like Amazon, AOL and eBay all boasted triple-digit stock prices. Even General Electric once sported a triple-digit price.

So what happened? Many of these companies split their stock and all of them saw significant share price erosion as tech stocks crashed from the peaks. The triple-digit stock prices didn't cause the businesses to struggle, but they were a sign that the market's enthusiasm ramped up considerably faster than the company's financials. That may lead investors in stocks like MasterCard or Chipotle to reflect a bit on their market performance and valuations.

Whither Apple?
In the limited history of large tech companies, market value leadership has been a mixed blessing. Microsoft held the top spot off and on for a few years before, frankly, getting too big for its own good and seeing growth fall off. Likewise, commodity companies have risen to the top only to be knocked off when commodity prices cycle down again.

As Apple gets larger and larger, it will find that there are simply fewer and fewer market opportunities large enough to keep revenue growing; delivering 20% growth on a revenue base of $50 million is a much different prospect than growing 20% from a base of $100 billion. Sooner or later, that growth is likely to slow and valuation multiples will shrink even faster, meaning that Apple will still be a major tech player (as IBM and Microsoft both still are), but won't enjoy the same eye-popping valuation.

The Bottom Line
So while the fact that Apple now trades for over $600 a share means relatively little for the business, the fact that it trades at over four-times sales may mean a little more for investors. While Apple's valuation tops the charts, it trails many companies like Wal-Mart, Exxon and Daimler in terms of revenue. If Apple can somehow build a car company-like revenue base, even further growth could be possible.

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