Arguably two of America's best run companies are Apple Inc (NASDAQ: AAPL) and International Business Machines (NYSE: IBM). Both have achieved high levels of success and shareholders have been rewarded along the way. However, both are treading in different waters and Apple is emerging as the winner going forward. In fact, I'm sure Apple will overtake IBM in value over the next two years. Bottom line: Apple will be bigger than IBM. I wrote in my book Stop Losing Money Today that Apple went from a fad/ niche player to a full-blown global phenomenon in the 1990's. That fact is even more pronounced now in 2007.
Apple will be a bigger company than IBM in terms of market capitalization. As of this writing Apple is just about to hit $100 billion in market cap while IBM is at $158 billion. The direction of both companies are at a variance to each other and Apple is certainly enjoying the strength of a major product cycle. My estimates for IBM for 2007/2008 revenues and earnings per share are $93 billion and $6.80 and $99 billion and $7.65 respectively. My estimates for Apple call for revenues of $24 billion and $3.52 and $29.5 billion and $4.05. So why is Apple going to be bigger than IBM?
IBM is experiencing a slow to moderate growth phase in its development. The global computer and related services giant has an excellent reputation among its customer-base: well deserved. But IBM is stuck in the phase of 3-4% top line growth, defending its turf from erstwhile competitors and few new products in its pipeline. The upgrades to current products is always there, but it is factored into the revenue mix. An aggressive share buyback program and a recently raised dividend will keep IBM's stock value fairly elevated.
Apple has the advantage over IBM with the powerful retail distribution stores now numbered at 177. Apple controls the entire consumer transaction in the stores, from basic Macs, iPods, etc., right down to the peripherals and software.The Mac has been generating excitement and market share gains as well as the CPU units Apple recently upgraded.
Apple wins the margin game as well. IBM's operating margins are stuck in the 13-14% range, healthy and envied by other hardware makers, but Apple's operating margins are driving north of 20%. That type of operating margin for a "hardware maker" is mouth-watering and again music to investors ears.
With top line and bottom line growth at 20%+, higher and sustainable operating margins, major new product cycle and a strong-controlled distribution system, I feel that Apple will hit the magical $200 billion market capitalization number before IBM does and IBM currently has a $50 billion+ lead in the race.
Apple may never top IBM in overall revenues but with all the other factors working in its favor, Apple shareholders should be far happier than IBM's.
Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas please visit the web site.