Amid the Market Carnage, Apple's the New King

Only a bit more than a year after it passed Microsoft (NAS: MSFT) as the most valuable company in technology, Apple (NAS: AAPL) has its sights set on a new target: the most valuable company in the world.

In the middle of the day Tuesday, Apple briefly passed ExxonMobil (NYS: XOM) to become the world's most valuable company. Afterward, Apple slipped back a bit, but make no mistake -- we witnessed the passing of the torch today.

For Apple, today's news is a long way from the bottom. In late 2000, Apple was worth just short of $5 billion, while Exxon was worth more than $300 billion, and Microsoft sat at a value of more than $360 billion. Despite its explosive growth since then, Apple still would've had to grow 56% to reach ExxonMobil's size just a year and a half ago, as this chart from last March shows:

anImage

Source: Capital IQ, a division of Standard & Poor's.

However, since then Apple hasn't just continued to sell enough iPhones, at fat enough margins, to command nearly two-thirds of all mobile phone profits. It's also released the iPad to a world skeptical of the need for what basically amounted to a larger iPhone.

The iPad doubters were wrong. As each quarter passed, and Apple obliterated estimates again and again, Wall Street proved wrong, too. Apple's stock kept soaring, while fumbling competitors like Microsoft saw their stock stagnate.

anImage

Source: CapitalIQ, a division of Standard & Poor's.

Brushing off the market carnage
The ascent of a new stock market king comes amid Wall Street panic. In the past week alone, oil fell nearly 18%, as investors feared a double-dip recession would curtail demand. That explains ExxonMobil's 12% plunge during that time. However, while it has seen its own 6% drop, Apple has hung on far better than either Exxon or the general market during the past week's panic.

That might not seem fair to investors. After all, Apple sells premium-priced products, which simple logic dictates should struggle in a double-dip recession. If investors are fretting over that very scenario, and sending markets crashing in the process, shouldn't Apple be falling more than other stocks instead of swiftly rebounding ahead of the market?

Brushing off consumer fears
No, it shouldn't. You can largely thank the unique business model of the iPhone, and smartphones in general, for that resilience. Apple sells iPhones to carriers at an average price that exceeds $650 per phone. Competitors such as HTC might sell their phones to carriers at a price around $450, but in the end, carriers subsidize both models -- meaning they effectively eat part of the cost of the phone -- and are sold at relatively similar prices. In the United States, top-end smartphones generally sell at about $200 after contract. This artificial market, where phones are subsidized and consumers generally don't realize the full cost of their purchases, allows Apple to collect those amazing profit margins on its phones.

Another economic downturn could hurt Apple's other product lines, like Macs and iPads, which aren't as heavily subsidized. It might even force consumers to reevaluate their pricey data plans. But on the whole, the iPhone's driving Apple's bottom line. It now contributes 47% of Apple's sales, and an even greater proportion of its profits. With the iPhone holding up better than expected even as the economy sputters, Apple's continuing growth looks like it's in good shape.

But wait, there's more good news!
One other area is driving Apple's results: booming international sales. That's a common trend, especially in technology; Intel (NAS: INTC) credited growth in markets like China and Brazil for its ability to crush analyst estimates last quarter.

Once again, analysts lowballed Apple's ability to succeed abroad. Consumers in these markets don't have a lot of money. In China, a new unlocked iPhone would eat up 49.7% of the average citizen's annual household income. Also, while contracts that subsidize phone costs are common in developed markets, in emerging markets it's more common for phones to be sold at their far higher actual selling price.

However, against all these obstacles, Apple has seen demand boom across the world, with the highest growth seen in developing Asian markets.

Market

Sales Growth Between 2005 and 2010

Profit Growth Between 2005 and 2010

Americas 268% 682%
Europe, Africa, and Middle East 508% 1,518%
Japan 331% 1,156%
Asia-Pacific 727% 2,991%
Source: Capital IQ, a division of Standard & Poor's. Retail sales are distributed in proportion to general sales level. Accounting for regional differences in retail store sales, end sales may differ slightly.

Just last quarter alone, Apple was proud to brag that sales to Greater China had grown sixfold. Last quarter, sales to Greater China totaled a sizable $3.8 billion. Even if American and European growth fizzles off, Apple should still see continuing growth in emerging markets.

The new king to stay
So even as the market crashes around us, Apple's growth story looks surprisingly strong. While investors might be afraid to buy Apple, based on either its sheer size or their own fear that another recession could quickly sap its growth, the company's future looks surprisingly strong. Trading at just 14 times earnings, with plenty of growth ahead of it and $76 billion in the bank, Apple still looks like a compelling deal. The crown atop Steve Jobs' head appears perfectly fitted.

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At the time this article was published Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Apple and Microsoft. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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54 Comments

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darbrow717

Exxon will have to raise the price of gas now.

August 10 2011 at 8:36 AM Report abuse rate up rate down Reply
Joe

Apple makes products that not only work but compare to none. I bought a couple of Android Tablets and they sucked. So I paid the extra and bought an Ipad2. Been happy ever since. You do get what you pay for with Apple.

August 10 2011 at 6:35 AM Report abuse rate up rate down Reply
stephie

it doesnt surprise apple products especially anything that starts with an I are more expensive than any of the comparable others

August 10 2011 at 5:04 AM Report abuse rate up rate down Reply
Gabriel

Does anyone besides Steve Jobs, Bill Gates and the CEO of Exxon really care?

August 10 2011 at 4:31 AM Report abuse rate up rate down Reply
sgentilejr

Has anyone checked Apple products (and other items with parts from Japan) to see how radioactive they might be??? Many of the parts in Apple's products come from Japan and since the Earthquake and nuclear plant melt down in Japan___they are finding that more and more item in Japan from milk to beef to fish are radioactive at highly unsafe levels. Some nations are refusing to accept cargo from Japan because of radioactivity and South Korea is refusing to allow Japanese people to enter their country until the people are checked for radioactivity. We are overlooking the possible dangers when we buy any products (Hondas, Toyotas etc.) with parts in them that came from Japan.

August 10 2011 at 3:44 AM Report abuse rate up rate down Reply
robertmb56

The ignorance of the comments made by rumpo, numnuts101, et al (that means the others) is positively astounding. Amazing that walking and breathing are done simultaneously. Do a little reading, if possible, about the companies and the investments made. Sure, both have overseas interests. They are a global company with HQ in the US. These are companies which plan for 20-30 years ahead, not just until the next election. Sure, a lot of money is made but even more is invested. The ROI (return on investment) is lower than most pharmaceutical companies, insurance, and many others. Profit on a gallon of gasoline is small but throughput is high, thanks to the American and foreign workers who are paid an excellent wage for their expertise. I'm sure Apple and other similar tech companies are the same. Maybe the CEO and others make what seems to be too much money. You are likely buying gas produced by them even if you don't know it. Would you take the money if you were smart enough to run a corporation like that?
Do you have any idea of how much federal, state, and local governments add to your costs for energy?
I didn't think so.

August 10 2011 at 3:41 AM Report abuse rate up rate down Reply
rumpoint4us

I personally refuse to buy gas at an Exxon station. Their leader and top management make too much dinero.

Part of what's wrong with our economy is the top guys are making too much. And everyone, whether it's Tillerson at Exxon, Pandit at Citigroup, or Cook at CVS, the CEO at Verizon it's all out of whack. To be clear the smart minds, the people who steer and lead their cos. to success deserve big bucks but it has been over the top for too long. Athletes the same! A-Rod, Lebron, Burnett of the Yankees and countless others get too well paid and the "Joe the Plumbers" (remember him?) "US" pay everyone whether at the pump or at the ballpark.

Tunisia, Libya, Syria, London and soon ( and I hope it will be civil) the protests will be here any day now.

The gap between the top and the bottom >which is everyone else> is too much and explode it will) !!!

August 10 2011 at 2:05 AM Report abuse rate up rate down Reply
Clint

Apple also has a market in Benefits Packages here in Europe. I was able to get a brand new, 64GB, 3G iPad2 as part of my contract through work. I have to pay them back for it ofc, but at £30 a month and I didn't have to get a credit check or anything. The company I work for has over 100,000 employees and there isn't a day that goes by that I don't see at least 15 to 20 iPads in the office now. That's just on my floor.

August 10 2011 at 1:18 AM Report abuse rate up rate down Reply
htsnum101

I cannot understand how a company as big as Exxon claims to only make a 3% profit on gas. doesn't seem like enought to keep the refinerys open, let alone pay the staff to run them. I would think they would shut them down.
But then again how can you make a 19 billon dollar profit in one quater, and then demmand a 2 million dollar tax break.
It just doesn't seem to make any sense, Unless your in WASHINGTON. God help us if we have to endure another for years.

August 10 2011 at 12:06 AM Report abuse rate up rate down Reply
estimatorone

Hey, I give a lot of credit to apple. Unlike exxon, apple sells products in a
very competetive market. They always have to come up with something
new and innovative. Exxon, on the other hand, just raises it's prices to
make money. Their market is totally competition free. I respect apple
as a true company (even though I was stupid for not buying shares into
the company many years ago) then I ever would for exxon (although I
can't afford their stocks either).

August 09 2011 at 11:52 PM Report abuse rate up rate down Reply