A Blog by Jonathan Low

 

Jan 4, 2022

How Apple Got To That $3 Trillion Valuation Is Not Just About Products

The iPhone accounts for 50% of its sales. But strategic diversification into services, development of its own chips and subsidies from wireless carriers have also bolstered performance. 

Perhaps the greatest intangible advantage has been its stock buyback program - the largest in business history - which has contributed to increasing the value of its shares. Analysts estimate it can continue to do that for at least another 4 years without having to take on any debt. JL

INDMoney and Dan Gallagher in the Wall Street Journal report :

Apple has purchased $488 billion of its own shares, by far the most of any company. Apple is able to continue repurchasing ~ 3-4% of its shares per year until the end of 2026 while growing its dividend per share by 10% annually without taking debt on its balance sheet. iPhone sales were helped by generous price subsidies from wireless carriers anxious to get more 5G devices. (But) diversification of its portofolio launched a plan (iCloud+, Apple TV+, Apple Music, Apple Arcade) for users last year. Services business grew 25.6% year-over-year and delivered more than $18 billion in revenue during the quarter.

INDMoney Apple is now worth $3 trillion. It became the first publicly traded company to ever reach the figure on Monday, when its stock briefly eclipsed $182.86 a share before closing at $182.01.

Apple’s value is even more remarkable considering how rapid its recent ascent has been. 

  • The first trillion dollars in market cap was achieved in 42 years
  • The second trillion was added in 2 years. 
  • The third trillion was added in just 16 months and 15 days. 

To put Apple’s size into perspective, Apple now accounts for nearly 7 percent of the total value of the S&P 500, breaking IBM’s record of 6.4 percent in 1984.

But why has Apple stock been the darling for everyone from retail investors to investing titans like Warren Buffet? 

Here are some reasons:

Stock buybacks: Apple’s immense sales and wide profit margins have provided it with a stockpile of cash big enough to buy a company like UPS, Starbucks or Morgan Stanley outright. At the end of September, Apple reported $190 billion in cash and investments. However,  instead of making a major acquisition, or even trying something ambitious and expensive like building multiple factories in the United States, Apple has decided to largely give its cash back to its investors by buying its own stock.

Over the past decade, Apple has purchased $488 billion of its own shares, by far the most of any company. Much of that spending came after Apple used a 2017 tax law to move most of the $252 billion it had held abroad back to the United States. Apple is now responsible for 14 of the 15 largest stock buybacks in any single financial quarter. 

Diversification of product portfolio: Apple’s success from the iPhone meant that a big chunk of their revenue came from the smartphone alone. This was a big risk and Apple recognised it. Their Intel powered Mac lineup had been dull and underperforming for the price for several years but when it unveiled its own chips inside the Macbook, it was a big hit. Considering work from home, sales from Macs soared to record highs. 

Not only this, Apple is also focused on services as a segment and has been bringing new developments every year in this segment. It launched a combined plan (iCloud+, Apple TV+, Apple Music, Apple Arcade) for users last year. Services business grew 25.6% year-over-year and delivered more than $18 billion in revenue during the quarter.

Future plans: Apple's augmented or virtual reality headset has yet to make an appearance in 2022. As Facebook's renaming to Meta has sparked a whole new wave of metaverse hype, Apple's headset could be sliding in just when the territory is heating up.

Apple could be blending AR and VR with two headsets in the near future, but leading the way with some sort of high-end AR/VR headset, according to a report back in January by Bloomberg's Mark Gurman. More recent reports from Gurman suggest a focus on gaming, media and communication.

Apple stock price outlook

Brokerages believe that Apple’s strong R&D and product portfolio will keep it relevant in many future generations to come.

Morgan Stanley's Katy Huberty raised the firm's price target on Apple from $164 to $200, and maintained the equivalent of a buy rating, arguing that new products like virtual reality and augmented reality headsets aren't yet reflected in the share price.

Bernstein analyst Toni Sacconaghi said in a note to investors earlier this month that he expects Apple to continue repurchasing shares over the next five years. “Our analysis suggests that Apple is likely to be able to continue repurchasing ~ 3-4% of its shares per year until the end of 2026 while growing its dividend per share by 10% annually without taking on net debt on its balance sheet,” Sacconaghi said in a Nov. 17 note to investors.

Wall Street Journal Apple Inc. AAPL -1.14% is worth $1 trillion more than it was nine months ago, yet the tech giant’s prospects haven’t changed that much in that time.

The company behind the iPhone, AirPods and “Ted Lasso” also became the first to hit a market value of $3 trillion on Monday. And while it remains an exclusive group, Apple isn’t alone in the 13-digit club: Microsoft, Google parent Alphabet Inc., Amazon.com, Tesla and Saudi Aramco all trade above that level, with Facebook parent Meta Platforms on the cusp of joining them.

That alone says a lot about the dynamics driving Apple’s shares as well as many of its other big tech peers these days. In a market of meme stocks, NFTs and electric-vehicle makers worth more than $80 billion before shipping their first car, trillion-dollar values for companies whose goods and services now sit at the center of modern life—while reliably generating billions in operating earnings—don’t seem so remarkable. Investors have taken on more risk overall; the S&P 500 and Nasdaq Composite are now trading 17% and 23%, respectively, above their respective five-year average multiples of forward earnings.

But Apple’s sharp rise can’t be fully attributed to market froth. At its current multiple of more than 31 times forward earnings, Apple is now at a 42% premium to the S&P 500 compared with its five-year average premium of only 4%. Investors banking on the company developing the next big thing cheer rumors of future products like augmented-reality glasses and even an electric car. The latter especially seems a long way off, though, if it arrives at all. Much of Apple’s elevated research-and-development spending over the past several years has gone to more internal efforts such as developing proprietary chips for its devices. Such efforts can certainly lead to more appealing products—Apple’s newest Macs powered with its own chips have been a bona fide hit—but they won’t radically alter the company’s fortunes.

Meanwhile, Apple faces the near-term challenge inherent in a cyclical business for which product cycles are getting longer. The fiscal year ended last September was Apple’s biggest ever, with revenue jumping 33% to a record $365.8 billion and operating income surging 64% to $108.9 billion. That was impressive for such a massive enterprise, but it was the company’s first double-digit growth in three years. And while Apple’s products and services logged strong sales across the board, the iPhone still makes up more than half of its revenue. Furthermore, sales of its latest smartphone were helped tremendously by generous price subsidies from wireless carriers anxious to get more 5G devices into customers’ hands.

Those dynamics won’t continue. Analysts expect iPhone unit sales to rise by only 1% this fiscal year compared with 24% last year, according to consensus estimates by Visible Alpha. And analysts polled by FactSet expect Apple’s sales to grow by an average of only 5% annually over the next three years. That is the lowest projected pace among the five big U.S. tech giants; Amazon, which now generates 25% more revenue than Apple while being valued about $1.3 trillion less, is projected to average 16% annual growth over the next three years.

Unfortunately, $3 trillion just doesn’t buy what it used to.

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