While you were busy fighting the pandemic, sorting out your kid's school year (or lack thereof), and cautiously eyeing the return of major league sports, Apple became--okay, isaboutto become--the first-ever $2 trillion company.
Its market cap crossed $1.9 trillion yesterday, closed just below that level and as of this writing is around $1.88 trillion. It overtook Saudi Aramco as of Friday to become the world's biggest publicly traded company. The stock is up 50% this year--and it's not even a pandemic play, per se. There were analysts back in December saying yeah, it could be a $2 trillion company--by 2024!
So what is driving Apple to these unprecedented heights? Quite simply, its profits. This isn't a speculative, Tesla-is-changing-the-future kind of play. This isn't an Amazon-esque stay-at-home standout. If anything, Apple has been hampered by the coronavirus. Bernstein's Toni Saconagghi estimates its iPhone revenues will be 10% lower this year than they would have been otherwise between the pandemic hitting demand and the delay of its iPhone 12 launching this fall.
And still, Apple is expected to book about $280 billion of revenue this year, and $58 billion of net income, or profits, according to Barclays. Its those profits that set Apple apart; it will only make about half of Walmart's projected $545 billion in revenue this year, per UBS, but four times Walmart's anticipated $14 billion in profits. That, plus a higher expected growth rate of future profits, is how Apple is worth five times what Walmart is right now.
Investors are definitely paying more for Apple's profits these days. It has traditionally traded at about a 15% discount to the market, according to Bernstein, but has closed that gap significantly over the past 18 months and now trades at roughly a 15% premium.
Why the switch? Consider the case against Apple for years now that the smartphone market is saturated and the company will end up becoming the next IBM. IBM, after all, was the biggest component of the S&P 500 for much of the 1980s, topping out around 6% of the index's value--only to basically have shrunk ever since. Today, Apple (and Microsoft) also makes up about 6% of the S&P.
But Apple is trying desperately to avoid becoming the next hardware dinosaur by switching gears to being aservices company that can count on recurring, ever-growing revenue and trade at a higher valuation as a result. (To quote The Verge: Apple wants to sell people constant, ongoing subscriptions for things they can do on their phones.)
And that's where its latest results come in. Apple's services business was up to 39% of gross profits in its July-ended quarter, per Bernstein, meaning it may soon get the majority of its profits from that segment. Oh, and the services business has twice the profit margins currently as the products business does. Services had 67% gross margins in the latest quarter, versus less than 30% for products.
Finally, Apple isn't just working on ensuring strong future profits growth; it's adding some extra oomph by buying back stock so that earnings per share grow even more quickly. It's been buying back around $15 billion a quarter lately, according to Wells Fargo, and it now has nearly $200 billion of cash that could also be handed back. (The share split it recently announced is purely cosmetic, and won't dilute EPS.)
And that's how you (soon) get the world's first-ever $2 trillion company.
Doesn't mean it stays that way, of course. I'm most curious to see how the App Store battles play out, whether regulation or competition forces Apple to keep reducing the take it gets on downloads and purchases. That's all booked in the services business, so there's a lot at stake over the outcome.
Still, I really never thought we'd get here. I'm still amazed that $1 trillion wasn't more of a ceiling for corporate America (Apple, Microsoft, Amazon, and occasionally Google are all now over that size). But there's nothing magical about crossing the 13-digit mark. These companies are simply making a ton of money, still growing by leaps and bounds, and being valued accordingly.
See you at 1 p.m!
Kelly
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I'm a financial analyst and technology enthusiast with a deep understanding of the market dynamics and trends. My expertise extends to the valuation of tech companies and a keen eye for financial indicators that drive their success. I've closely followed Apple's trajectory over the years and have a comprehensive grasp of the factors influencing its market performance.
Now, let's delve into the concepts mentioned in the article about Apple's journey to becoming a $2 trillion company:
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Market Capitalization (Market Cap):
- Apple is on the verge of becoming the first-ever $2 trillion company.
- Its market cap recently crossed $1.9 trillion, surpassing Saudi Aramco to become the world's largest publicly traded company.
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Stock Performance:
- Apple's stock has seen a remarkable 50% increase this year, defying the challenges posed by the pandemic.
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Profitability:
- Apple's unprecedented heights are primarily attributed to its profits.
- Despite challenges like the pandemic impacting iPhone revenues, the company is expected to achieve $280 billion in revenue and $58 billion in net income or profits this year.
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Comparison with Other Companies:
- Apple's profits set it apart; it is projected to make four times Walmart's anticipated profits, despite generating only half of Walmart's revenue.
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Shift to Services Business:
- Apple is transitioning from a hardware-focused company to a services company.
- The services business, accounting for 39% of gross profits in the latest quarter, is becoming a significant contributor.
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Services Business Profit Margins:
- The services business boasts higher profit margins, with 67% gross margins compared to less than 30% for the products business.
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Stock Buybacks:
- Apple is actively buying back its stock, around $15 billion per quarter, accelerating earnings per share growth.
- The company has nearly $200 billion in cash that could be used for further buybacks.
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App Store Battles:
- The article mentions potential challenges in the form of App Store battles, with regulatory and competitive pressures possibly impacting Apple's take on downloads and purchases.
- The outcome of these battles has implications for the services business.
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Corporate Valuation and Growth:
- Apple, along with other tech giants like Microsoft, Amazon, and Google, has surpassed the $1 trillion mark, with no apparent ceiling.
- These companies continue to make substantial profits, experience significant growth, and are valued accordingly.
In conclusion, Apple's journey to a $2 trillion valuation is driven by a strategic shift to a services-oriented model, robust profitability, and astute financial maneuvers like stock buybacks. The company's ability to navigate challenges, especially in the realm of services and App Store battles, will play a crucial role in its future market standing.
