Market Cap

A little bit over ten years ago, in the aftermath of the September 11 attacks, I decided to take advantage of the fact that a lot of publicly traded stocks were selling for a lot less than they really were worth.

One of the stocks that I bought at that time, was Apple Computer (since renamed to Apple Inc).

As was true for all of my investments at the time, I bought them because I liked the company and it really wasn’t a part of some greater investment strategy.

I bought ten shares of the stock, at approximately $16.00 per share.

About two weeks later, Apple launched a new device. It wasn’t the first of its kind on the market by a longshot. Maybe you’ve heard of it. It was called the iPod. This device changed Apple’s fortunes significantly.

In the intervening ten years since I bought that stock, the stock has split 2-for-1, which means that I now own 20 shares of stock, each of which has a starting price per share of $8.00.

(Note that at one point about two years after the split, my broker sold one of those shares to pay for brokerage fees, a move which I did not authorize. I learned about it when I got the tax bill for the sale of the share. I immediately bought that one share back, so my average basis of the twenty shares really works out to closer to $11 per share…)

I mention this because Apple’s stock passed a milestone today. As of the close of business today, one share of Apple’s stock is worth $542.44. Apple’s Market Capitalization crossed the $500 billion level today. ($505.8 billion, based upon this stock price…)

I suppose now is a good time to explain what market cap is. It’s a really simple formula. You take the stock price and multiply it by the total number of outstanding shares on the open market, and that’s what it is.

Some people say that it’s a measure of the size of the company. That’s somewhat true, but not universally. There’s a finite number of shares of stock of any company, and most companies like to maintain a certain level of availability on the open market, but it doesn’t speak to the total number of shares actually held by its shareholders (including me, an extremely small investor). It’s not a perfect measure of the size of the company, but it does say something. In other words, if you want to buy all of the outstanding shares of a company, that’s how much you’ve got to pony up. As you can guess, it’s a very important number for any company looking to buy another company.

Apple is the largest company in the world, based upon market cap. Has been since about mid-January, when it overtook Exxon-Mobil. Both Apple and Exxon achieved a $400 billion market cap in January. Now Apple is nearly $100 billion larger than Exxon.

Back in the 90’s, then-chairman of the Federal Reserve Alan Greenspan criticized the stock market for having irrational exuberance because of what he perceived as over-inflated stock prices. He was right, or at least prescient, as a lot of companies went under in the dotcom burst a few years later.

Apple’s stock has been going up this year as a direct consequence of two things:
— first, they reported earnings that were nothing short of incredible for the quarter that ended on December 31, 2011. Apple’s earnings were not only the best the company had ever seen, but also the second best quarter ever reported by any single company. (Exxon holds that record, going back to 2008, when gas was over $4.00 per gallon).
— second, the rumor mills have been speaking to a new iPad that will be launched next week. The rumors hold that the next generation of Apple’s already popular tablet will have a significantly better screen display (to the point that it will have a better resolution than a 42-inch HDTV), faster processor, and lots of other goodies. There will be a media event on March 7 to go over some of the details.

No matter what Apple announces on March 7, the stock will go down on that day. The stock is already inflated to reflect what the market expects of the product, so when we know the specifics, some people are probably going to sell. That’s what’s happened with every other major product launch Apple has had: the rumors drove the price up and the actual launch pushed it down a little bit.

It’ll take a lot more, though, for Apple’s market cap to end up at a point where it’s less than Exxon’s.

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2 responses to “Market Cap

    • Why would I want to do that? For each share I sell, I’ll have a $500 capital gain, so right there, I’d need to pay the IRS about $75 per share. Then the buy back would have additional commissions and fees. I have no plans, short-term or long term, to do anything with those shares other than grumble under my breath that I didn’t buy more…

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