The Trillion Dollar Dream.....(AAPL)

Got your attention...and not just apple fans!* 

With the market apparently in corrective mode at the moment I thought it would be fun to discuss an item on the lighter side of investing. In the article “Why Apple will be the First Company To Reach A Trillion Dollar Market Cap” by James Altucher, he lays out the case for Apple achieving this feat with some basic figures. There you have it folks it is official Apple AAPL has been given the KOD or kiss of death as I like to call it. The wheels have now been set in motion for a future debacle to take place as a result of purely linear thinking. Apple is not near the implosion point as of yet so investors need not fear an elevator ride to equity purgatory where former leaders wait for an investment eternity to rise like a phoenix again. The article does show how easy it is to be bowled over by a story stock and believe that it will perform forever without ever taking in to consideration trend changes, market saturation or other eventualities.

Altucher bases trillion dollar projection on beliefs regarding the growth assumptions of I-Pad sales and their 30% margins. Additionally, he believes that the Verizon VZ deal with Apple will drive I-Phone demand. He also puts fort the notion that the I-Pad\I-Phone story will lead to increased “app” demand as well as music downloads, both of which Apple gets a cut of the selling price. I believe that the author has a bit of a “Apple” crush and he alludes to it many time in his article. Unfortunately for Altucher we don't live in a linear extrapolation world. There are a variety of head winds that can and will crop up for Apple.

To start with, up until recently I-Pad was the only game in town and no one could touch it. They say imitation is the most sincere form of flattery, but nothing breeds competition like success. This year alone there are some 35 various tablets being introduced in to the market, many of them with Google's GOOG rapidly growing Android operating system. The sheer volume of entrants in to the tablet space will likely loosen Apple's stranglehold and the impending price competition will also cut in to Apple's margins. Moreover, in case the author did not look around there has been some hefty commodity inflation and many of the components used in the manufacture of the I-Pad and I-Phone have risen in price which will also impact Apple's margins.

The author also believes that the Apple I-Phone being available on the Verizon network is going to cause a huge influx of demand for the I-Phone. While I do believe that there will be a pick up for the I-Phone from those on Verizon and a few ATT T stragglers, however, it will be muted because of the structure of the cellular industry. The cell carriers have created a scenario where they subsidize the cost of the phones by imposing hefty termination fees, which makes it less likely that a consumer will hop from one phone or carrier to another willy nilly. Instead there will be some fraction that will eat the costs and jump to the I-Phone and Verizon, but I would contend that the number would be on the low side at least for the first year or two(early term fees apply to 1 and 2 year contracts). Even though the phone is available on what is perceived to be a better network, the majority of consumers especially in these tight times are not going to just toss money out the window because they might have one or two less dropped calls this month. While it is true that ATT has cut the price on its I-Phone 3GS to a very reasonable price the argument for sales increase is the switch and Verizon is not cutting the price rather they are “banking on their network” to make the sales.

The figures that the author stipulates regarding the additional monies that Apple makes from downloads could also be impacted especially if competition for consumer electronic dollars are drawn in different directions by non Apple gadgets.

There have long been a core group of consumers who would never look at anything but an Apple product. Apple's success has been based upon the combination of brand loyalty, great design and the ability to command high market prices for their products. There is now way you can convince a diehard Apple fan to use anything else, but this accounts for only one segment of the consumer market.

The reality is that Apple has carved nice market share in many segments but they are not the only players. Altucher goes on to talk about how he is going to abandon his HP laptop for a Mac Book Air and I am sure that there are others that do this as well, but most people are not as impulsive. Especially in the laptop arena a litmus test is how much of the software that is written for laptops is for Mac vs PC, the reality is that only about 10% of all software is written for Mac.  The point is that Apple has made inroads in to the PC market with the Mac Book and the inverse can also be true when it comes to the I-Pad segment. The disadvantage that Apple has in the Tablet arena is that they are but one manufacturer and they retain draconian controls on the use of their products, which could lead to their undoing (think Betamax). Conversely, Google has much to gain as they license the operating system and have an army of manufacturers bringing product to market to compete head to head with Apple. If you just watch a modicum of TV you will be exposed to a plethora of different manufacturers and service providers pushing a new Android based device at least 2 times an hour. It is true that the manufacturers do not benefit as much directly from Android as Apple does from its products but at every turn there are competitors knocking with a giant piling on the Apple fortress gates. Having been an Android adopter I have seen firsthand that it is a nice operating system and Google has made it a priority to keep upgrading it. It is true that the Android operating system is not as slick as Apple's yet but it is very nice none the less and at least it is not Windows!

It is apparent that the author is in love with Apple and the stock, and his arguments and conclusions smack of the same sentiment that we heard about another market daring that could not go wrong at the 2000 peak. Nothing lasts forever and Apple has had a good run and will most likely go higher over the near term. There is always the risk that Apple stumbles, the economy stumbles or someone comes out with a better mousetrap.  In just recent news Steve Jobs the “brain” behind the juggernaut announced another medical leave and the stock promptly declined. Jobs' absence does not necessarily mean a problem for Apple in the near term as many of the products and vision are already in place for the immediate future. The problem may arise if gods forbid Jobs unable to return; then will there be enough vision to carry forward. We have seen in the past where Apple almost came apart at the seams and Jobs had to return. Once the current Jobs pipeline runs out investors may be more skeptical about Apple and its potential unless someone can come to the fore to fill some pretty big shoes.

Apple may well become the first trillion dollar company but it will more likely be because inflation or dollar depreciation has taken hold more than their being able to triple in value organically. At some point the law of large numbers comes in to play as it becomes mathematically impossible to grow. If Apple did reach the 1 Trillion dollar mark at what pace would they be growing their earnings? At the Trillion dollar market cap level would Apple's earnings and or growth is able to justify their value at a market cap three times larger than now? I think upon reaching that magic threshold and probably before that Apple would be well overvalued and likely suffer from PE compression. If Apple did even briefly make it to a stop at the 1 trillion mark could you even imagine the media blitz and CNBC high fives all the way around.

  As I said before the last time we heard talk of a trillion dollar company was at the 2000 top and the company was Cisco Systems CSCO. In fact, while I was looking for the link to the prior article I came across another one relating to speculation about Google achieving the Trillion dollar mark as well. There was even an article I came across that posited the idea that Amazon AMZN could achieve a 1 trillion dollar market cap. As Shakespeare once said “There is nothing new under the sun”. The dream of a trillion dollar market cap has been with us for a long time and each time all the reasons are put forth as to why this will be achieved by people with rose colored glasses. It is perfectly normal to like the companies you invest in, but if you love them it colors your objectivity as you can see by the prognostications mentioned. While I own Apple shares and I believe they will perform very well for the foreseeable future I know there will come a time for an amicable divorce, which may be sooner than Mr. Altucher's taste.

* Image from the following url: http://cdn.uberreview.com/wp-content/uploads/ijustine-apple-tattoo.jpg

I post this column on Thursdays here at Benzinga although I do have my own blog (monetaadvisors.com) where I cover stocks, commodities, precious metals, currencies, markets, government and interesting general observations that may not get play on Wall Street as well as subjects that interest me and hopefully you too. I also have a Twitter Feed @monetaadvisors if you are interested. I am a Series 65 Investment Advisor Representative and have recently started my own investment advisory called Moneta Advisors, LLC, based in the Boston area. I have been through a series of careers from which I have learned many useful things along the way. In my past I have been a stockbroker, computer programmer, Sr. computer consultant, and ran a manufacturing company; all the while I remained a private investor.