wall street trillion dollar baby
Trillion-Dollar Baby: Can Apple Go Where No Stock Has Gone Before?
Is Wall Street finally get on board with the world’s most valuable company again? Over the past several weeks, at least five analysts have upgraded price targets on Apple. (Details here, here and here.) In the meantime, the company has seen its shares reach an all-time high of $117.57 before closing out the week at $116.31. That price gives Apple a market capitalization of $680 billion — more than Microsoft, Amazon, Netflix and Twitter combined. The markets too have been setting records of late, though, raising questions as to whether Apple is merely the beneficiary of a rising tide and whether its current rally will continue. Here we’ll examine some of the trends working for and against the company’s shares and try to answer one of the most fascinating questions of all: Can Apple be the first trillion-dollar company?
Russian revolution. A few weeks ago, a statue of Steve Jobs was torn down in Russia after Tim Cook confirmed the worst kept non-secret in Silicon Valley: that he’s gay. Well, karma’s a funny thing. As Tim Worstall reported in Forbes last week, Apple is now more valuable than the entire Russian stock market. Of course, this isn’t because of Putin’s foolish anti-gay politics, but rather the combination of the ruble’s collapse, the decline of oil prices, and the general mismanagement of the Russian economy. It’s nevertheless noteworthy that one U.S. firm that stood on the brink of bankruptcy in the late 1990s is now more valuable than all of the companies in Russia.
Hey, remember the ’90s? Speaking of those 1990s, back then Microsoft was on top of the world and even part of bailing out Apple, with a investment of $250 million. It was pennies for the software maker, which would eventually reach a peak of $619 billion on December 30, 1999. While it appears as though Apple has easily eclipsed Microsoft’s record, keep in mind that even the relatively mild inflation of the past 15 years takes it toll after a while. That $619 billion would be $882 billion today.
Microsoft, incidentally, would trade down around the $200 billion mark after reaching its peak but has subsequently recovered and is just under $400 billion today. Oh, and Microsoft earned $7.8 billion in 1999 which meant the price/earnings ratio peaked just around 80. Such was the frothy tech-stock bubble of the late 1990s.
Bubble bath, Part II? The Nasdaq crash that followed in 2000 has a lot of people worried we’re headed for a repeat. One of the increasingly loud voices — by his own admission — is Business Insider’s chief Henry Blodget, who called stocks “fantastically expensive” the other day. But compared to the 1990s, most large technology companies aren’t especially pricey. A very broad measure of market valuations looks at price/earnings ratios for the S&P 500. It currently sits at 19.27. Apple, Microsoft, and Qualcomm are all below that average. Yes, Google sits above it, but at 29 is well below Microsoft’s 1999 mark. And Facebook’s 68 might be vertigo inducing, but analysts see earnings rising enough for it to fall sharply next year if the stock doesn’t move up much. In this regard, at least, things are different this time.
Nasdaq attack. While the Dow and S&P keep smashing all-time highs — with more than five dozen records between them — the one index that hasn’t done so is the tech-heavy Nasdaq. The March 10, 2000 close of 5,049 is still more than 300 points away. But it seems tantalizingly close thanks to many of the companies mentioned here. The resurgence of Microsoft, the incredible run of Apple and the twelve-figure club’s newcomers like Facebook and Google (neither a member of the index back then, one not even yet in existence). Qualcomm, Intel and Cisco were part of the heady days back then and are still quite valuable now, even as many others have gone by the wayside. Because the Nasdaq is weighted by market capitalization, it’s driven by its most valuable companies.
Bye buy. And those valuable companies have made it challenging to see their market capitalizations grow for a while. Why? Share buybacks have taken a lot of their equity off the table. While those buybacks do have the marginal effect of making existing shares more valuable, all that stock basically disappearing is a challenge. Consider that Apple has spent $70 billion buying back its own stock over the past couple of years and the market cap record it has attained is all the more impressive. The reason is simple math: It takes a higher stock price when multiplied by fewer shares to get the same total. It’s important to realize that Apple bought a lot of its stock back at far lower prices than the company trades for today. That’s mostly good news for shareholders but also serves to depress the market cap.
Under-owned? As Forbes’ Chuck Jones wrote, Apple is still out of favor, at least relatively, with institutional investors. The company represents 3.8% of the S&P 500 by market cap, but only 2.5% of portfolios on average. IBM, HP, and Oracle are all “over-loved” by portfolio managers compared to Apple, despite having relatively questionable futures. Hedge funds dumped $1.3 billion worth of Apple recently, but it’s still one of the largest holdings among the biggest funds. If Apple ever were truly in favor with institutions or “overvalued” on a P/E basis, the stock would rise sharply.
Analyzed. Those analysts we spoke of at the beginning all see the stock going higher. But none have it going especially higher. BTIG and Piper Jaffray are looking for $135 per share, Oppenheimer sees $130, while Morgan Stanley is at $126. That’s just one dollar ahead of UBS’ $125. To get all the way to the trillion-dollar level, Apple would need a bump of 47% from here. With the company still committed to buying back even more stock, that puts the needed share price at $173 or so.
Trillion-dollar baby? The gap between today and that trillion-dollar mark shows why the road there has been so fraught in the past. It seemed like a near-certainty someone would arrive at its end when the ’90s were still roaring. In fact, serious investors wondered whether it might be Cisco or Vodafone who’d get there first. Today, reasonable people still talk about Microsoft and Google, along with Alibaba as possibilities. Of course, none are anywhere near as close as Apple — the only one that could seemingly get there anytime soon.
“Absolutely, without a doubt,” Michael Corcelli, of Alexander Alternative Capital, told Reuters when asked if Apple could reach $1 trillion in 2015. But Carl Icahn, who has pushed the company to engage in more buybacks and suggested Apple is potentially worth more than $200 per share wasn’t willing to put a timeframe on it when pressed: “That’s a question that is extremely hard to answer.”
Capital expansion. The biggest challenge is that as the valuation rises so to does the amount of money it takes to sustain it. One way to think about is that a rise in Apple’s price of 10% over 20 days would require buyers of about $150 billion worth of stock (assuming a fairly even march upwards). If the stock were already 30% higher, you’d need $190 billion to flow into Apple shares to sustain the same percentage gain. The reason is that volume won’t tend to abate as the stock rises. If anything, it might increase, worsening the problem. For every seller, there needs to be a buyer of course. And the sheer volume of the required capital flows has been a giant roadblock to the giant market cap in the past.
This is especially true because the mere approach of a milestone like the trillion-dollar level will bring out every skeptic, every bear argument and every reason for people to take some Apple profits off the table. The countervailing force this time is that Apple will be bringing to market a new product early next year with the Apple Watch, has recently released Apple Pay, and may yet have something else on tap for 2015 that investors could perceive as a big opportunity going forward.
If things come together, this time it will be different. If not, Apple’s march toward $1 trillion will find itself interrupted sometime before it gets there. Whether it’s a market slowdown or an Apple slowdown, something will likely get in the way.