At the end of last year I was at a client dinner where the following debate bubbled up: “Which should have a larger market cap… Amazon or Apple?” I argued for Amazon, given its larger addressable market and stellar growth in home automation, AI and cloud services. Long time Apple investors felt their stock should be worth more, given its strong profitability and large cash position.
Fast-forward 8 months, and it looks like Apple, not Amazon, will be the first company to a $1 trillion valuation. I take some comfort that Amazon’s stock is +55% to Apple’s 19% in 2018, but the fanboys had the right call. And in that lies a few lessons about how markets evaluate Tech stocks and equities in general. A few thoughts:
#1. Companies can be more powerful than sovereign governments. Apple is an American company that assembles its products in China. It is so successful in each country that it has avoided the fate of many American transnational companies: being a piñata in the global trade/tariff debate. While this political hedge was clearly an accident of history, it works well today.
#2. Software may eat the world, as Marc Andreessen famously said 7 years ago, but it still needs hardware. Apple actually makes physical products as its core business. That is not true of Amazon, Google, Facebook, Microsoft or any other super cap Tech name. Making physical stuff people want to buy is still a relevant business model.
#3. You don’t need a +20x price earnings multiple to get to $1 trillion valuation. It would be logical, but wrong, to think a huge valuation must stem from a sky-high PE ratio. Apple trades for 17.3x next year’s consensus estimate, even before you exclude cash. That’s barely above the market multiple of 16.7x.
#4. Management need not be iconic/visionary founders. When Steve Jobs passed away, many wondered if Apple could continue to innovate and lead. We have our answer. The iPhone will be Steve’s legacy, to be sure. But the team he put in place was able to find new ways to leverage it without his direct guidance.
#5. Respecting data privacy and security helps equity valuations. While no Tech company is immune, Apple has been able to avoid the worst of this year’s blowback on customer privacy, election meddling, and all the other negative headlines that have plagued much of Silicon Valley. Remember when Tim Cook took Uber to task for its overly intrusive app? That ethos has paid off in spades.
#6. Premium products and brands still matter. That may sound obvious, but in Tech it isn’t. If smartphone unit counts drove market cap, Samsung would be getting ready to ring the $1 trillion bell instead of Apple. The iPhone is that rare disruptive product that did not enter at the low end of the market like Amazon did with books or Google with free search. It transformed human communication with third party apps, global mobile Internet, and other services Apple didn’t have to spend a dime on. All while charging more than the competition in every market around the world.
Summing up: yes, $1 trillion is just a number. It doesn’t make Apple more or less investable. But it is a milestone, and it pays to remember the route of the journey.