Analysis: Is Apple really worth $3 trillion and why is the tech giant the most valuable company?

On Monday, Apple made history by being the first corporation to reach a market capitalization of $3 trillion (€2.6 trillion), before concluding the day just short of the threshold. It comes as investors hope that the iPhone maker would continue to release best-selling goods while branching out into other areas such as self-driving cars and virtual reality.

But, 16 months after being the first firm to be valued at $2 trillion (almost €1.8 trillion), is the digital behemoth truly worth $3 trillion (€2.6 trillion)? The answer is contingent on how one evaluates Apple’s capacity to maintain its 15-year run of extraordinary growth.

Apple’s sales increased by 33% to $365.8 billion (€323 billion) in its most recent fiscal year, which ended September 25, thanks to high demand for 5G iPhone upgrades. However, this surge in sales came after a year of single-digit sales growth and a fall in Apple’s sales in the 2019 fiscal year.

Apple’s latest innovations

The company’s bull argument is that it has established an ecosystem of a billion iPhone users who spend money on services, and that it is well-positioned for future categories such as self-driving cars and augmented reality.

The deep discount investors once assigned to Apple’s stock due to the company’s reliance on the iPhone for sales growth has vanished, as the company has demonstrated that the iPhone is at the center of an expanding solar system that includes new gadgets like the Apple Watch and Apple AirTags, as well as new, paid services like television and fitness classes.

“Apple has been and continues to be a phenomenal success story, with must-have goods and an expanding suite of services. While the stock price was once a value investor’s dream, I don’t believe the present near-record high price should be interpreted as a sell signal for long-term investors “Trip Miller, managing partner at Gullane Capital Partners, echoed this sentiment.

According to Refinitiv statistics, Apple is currently trading at around 30 times estimated 12-month earnings, down from a high of 32 in early 2021 but still near 2008 levels. Apple has been a “safety stock” during the epidemic, said to Hal Eddins, chief economist at Apple shareholder Capital Investment Counsel, and investors are likely expecting strong holiday sales.

According to Eddins, Apple “looks to be immunized against anything Omicron can throw at it.” “At this level, I’m not complacent, but there would have to be some horrible unforeseen circumstances to shake things up.” With forthcoming goods like the Apple Car, some analysts feel Apple has plenty of room to develop in the coming years. In November, Morgan Stanley analyst Katy L Huberty wrote, “We see the prospects of Apple Car – representing the clearest path to doubling Apple’s revenue and market cap – catalyzing a shift in investor narrative back toward the attractiveness of the platform (1 billion loyal customers) and long-term, sustainable growth.”

There are no guarantees

The downside is that Apple is reaching the boundaries of how large it can grow its user base and how much money it can extract from each user, with no certainty that future product categories will be as profitable as the iPhone. Bernstein analyst Toni Sacconaghi told investors in a December note that while Apple’s prospects in the augmented and virtual reality category are good, they would likely account for only 4% of company sales by 2030.

Furthermore, he said, the overall market for those gadgets is unlikely to reach the billion-unit milestone until 2040. Given slower predicted growth in the coming fiscal year, Sacconaghi saw “no obvious triggers for multiple expansion” in Apple’s shares. On the stock, he has a market perform rating.

Another source of concern is whether Apple will be able to lock in the same earnings for subscription services on future products. Proposed legislation in the United States and Europe has attacked its App Store business model, which earns commissions on in-app purchases of digital items. To be clear, one of the main drivers of Apple’s skyrocketing stock price is the company’s aim, set in 2018, to remove approximately $100 billion (€88 billion) in net cash from its balance sheet and become cash-neutral.

Apple has struggled to fulfill that goal, which it has never set a timeframe for, because it simply keeps earning money.
In fiscal 2021, Apple generated $104 billion (about €92 billion) in cash from operations and returned $106.5 billion (approximately €94 billion) to shareholders. The company’s net cash, however, remained at $66 billion (€58 billion) at the end of the fiscal year.

With substantial acquisitions essentially off the table due to existing antitrust regulations in the United States, Apple has had little options but to return cash to shareholders, according to Tom Plumb, founder of Wisconsin Capital Management and an Apple shareholder.

“They’re resisting the fact that they have an annual cash flow of $100 billion [€88.5 billion],” Plumb remarked.
“It’s impossible to bet against a company with this kind of cash flow.”

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