Apple, now valued at $700 billion, is the most valuable company in history. With its decade-long bull market showing no signs of tiredness, might the iPhone-maker become the world's first company to sustain a trillion-dollar valuation? It won't actually be the first to top the $1 trillion mark by virtue of PetroChina briefly flirting with that level when it tripled on its stock market debut in Shanghai in 2007 – before quickly falling back to more realistic levels.
"Absolutely, without a doubt," said Michael Corcelli of Alexander Alternative Capital recently, telling Reuters that milestone may even be reached in 2015.
“Right now Apple is the most obvious thing that has to go up,” he added. A sceptic might ask if it is that obvious, given that Apple has already risen nearly 50 per cent this year and has more than doubled over the last 18 months. It remains well shy of the $1 trillion level, and only the most euphoric envisage another 45 per cent rise in 2015.
It’s a far cry from the late 1990s. Then, Microsoft, valued at $613 billion, was the obvious trillion-dollar contender. At the peak of the dotcom bubble, Microsoft was 26 times as valuable as Apple. A decade later, it had lost two-thirds of its value. Although it has rallied in recent years, Microsoft’s current $400 billion market capitalisation is a distant second to Apple.
Not expensive
Some warn Apple may suffer a similar fate. However, comparisons between Microsoft in 1999 and Apple in 2014 are superficial. Microsoft earned $7.8 billion that year; Apple is expected to earn $39.5 billion in 2014. Microsoft traded on 73 times earnings, whereas Apple is valued at 18 times trailing earnings, or just 14 times forward estimates.
Apple is actually cheaper than the S&P 500, which trades on about 16 times next year’s estimates. If one accounts for Apple’s enormous cash pile – it has $126 billion in net cash – the stock’s earnings multiple looks even less demanding.
Apple has racked up almost $183 billion in sales over the last year, giving it a price- sales ratio of 3.7 – less than Google (5.3) and Microsoft (4.4).
Doing the maths
Apple may not appear expensive, but that doesn’t mean a trillion-dollar valuation is nigh. Let’s say Apple’s price/sales ratio stays constant in the coming years. To become a trillionaire, so to speak, Apple would need to generate $270 billion in annual sales – almost $90 billion more than it achieved over the last year, and some $50 billion more than what analysts project for 2016. Note too that Apple’s current price/sales ratio is its highest in more than two years.
At one stage last year, it traded on just 2.2 times sales. If investors decide a lower ratio is merited for a mature company like Apple, its future revenues would need to be higher still. This suggests a trillion-dollar valuation is years away, at best, as does analysis of Apple’s earnings potential. If Apple continues to trade on a trailing price/earnings (P/E) ratio of 18, it would need to generate annual profits of around $55.5 billion to merit a trillion-dollar valuation. However, note that the recent run-up in Apple shares has driven its P/E ratio to its highest level since 2011.
Over the last five years, Apple’s average P/E ratio has been 15.5, with the company trading on just nine times trailing earnings at last year’s lows. Assuming its P/E ratio reverts to the 15 level in future years, Apple would need $67 billion in annual profits – 70 per cent more than this year’s $39.5 billion in profits – to breach the trillion-dollar level.
Consensus estimates for 2016, needless to say, are nowhere near such heady heights. Apple's share repurchase system may make the earnings task less onerous. Apple analyst Neil Cybart, for example, estimates share buybacks have added $80 billion of price to Apple's stock in recent years.
Still, earnings will still need to rise – a lot – to justify trillionaire status. Apple Pay, the firm’s foray into mobile payments, will contribute, as will Apple Watch. The consensus analyst estimate for 2015 is for sales of 22 million units. Estimates vary wildly, so there may be room for upside, although the gimmicky nature of Apple Watch means it will not ever be a must–have device.
Mac sales continue to be healthy, rising 21 per cent over the last 12 months. That has surprised many, who expected it to be cannibalised by iPad sales. Instead, iPad sales in the most recent quarter were the lowest in three years.
A new, larger 12-inch iPad is expected to be launched early next year, presumably providing a healthy sales bounce. Sales of the iPad mini, however, are likely to be pressured by Apple’s entry into the so-called phablet market.
The new iPhone 6 plus has a 5.5-inch screen, just 2.4 inches less than the iPad mini. According to the makers of the Pocket app, new users of Apple’s largest smartphone are using their tablets 36 per cent less than before.
Ultimately, however, Apple’s future will be driven by the iPhone, which accounts for 54 per cent of total revenues. Just 18 months ago, analysts were slashing iPhone sales estimates. The launch of the iPhone 6, and Apple’s belated realisation that consumers wanted larger screen sizes, has changed all that.
Ming-Chi Kuo, an influential analyst with KGI Securities, estimates Apple will sell a record 71.5 million iPhones in the holiday quarter, up 40 per cent year on year. If he’s right, that would mean the iPhone alone would generate more revenue than the entire company did in its last quarter.
Insatiable demand for the latest iPhone has driven recent stock gains, with analysts enthusing breathlessly over a “supercycle” of user upgrades. However, there was always going to be pent-up demand for a larger iPhone, as Apple has persisted with its traditional four-inch screen over the last two years. 2015 sales may be great, but this may be the last great upgrade cycle, given that future changes and improvements will be incremental rather than revolutionary.
Risks
The main risks for Apple are much the same as they have been for many years now; an over-reliance on one product (the iPhone), competitive pressures in a fast-changing environment, and the sustainability of extremely high profit margins. Apple has proved the naysayers wrong for some years now, although time will tell if it will eventually succumb to what high-profile money manager
Rob Arnott
calls the “winner’s curse”.
The biggest companies in a particular sector, Mr Arnott has found, tend to underperform in future years. Investors usually assume they will remain top dogs, but the law of large numbers means corporate minnows find it much easier to grow than corporate behemoths. Indeed, Ned Davis Research has found that a portfolio of companies that topped the “most valuable” list over the last 40 years returned around 400 per cent, compared to almost 5,000 per cent for the S&P 500.
Bulls will counter that Apple’s valuation is not especially heady, and that it is therefore well placed to buck the historical trend, as it has done since 2011, when it first became the world’s most valuable company.
Similarly, there is nothing inherently unreachable about a trillion-dollar valuation. Valuations rise over time; records get broken.
Waiting game
However, talk of a trillion-dollar valuation in 2015 is overdoing it. Were Apple shares to enjoy an average annual rise of nine per cent in the coming years – the historical norm for stock markets – it would breach the $1 trillion level at the end of 2018. Earnings, as noted earlier, would likely have to increase by somewhere in the region of 50 to 70 per cent. For a company the size of Apple, well run as it is, that remains a formidable challenge.
Still, with a market value that is $300 billion more than its nearest rivals – Microsoft, Exxon Mobil and Google – Apple is clearly best placed to become the world’s first trillion-dollar company. It just might have to wait a few more years to do so.
