Apple’s valuation has reached heights markets have never seen before, at least in nominal terms, with the iPhone maker’s market capitalisation eclipsing $770bn.
Now worth more than the entire S&P 600 small-cap index, or two Berkshire Hathaways, the question for some investors is whether the Cupertino-based technology behemoth can even surpass the $1tn mark.
Other technology groups, such as Microsoft and IBM, have enjoyed rocketing valuations only to fall to earth. Yet Apple bulls have thus far been in the ascendant, sending its shares to a new all-time high this week.
Analysts, too, have taken the view that Apple will if anything go higher, lifting price targets at a heady clip. Goldman Sachs increased its target to $145 a share last week — worth $845bn based on current share counts. The highest target, at $165 from First Shanghai Securities, would see Apple’s market valuation rise to $960bn.
Accelerating iPhone sales, rising earnings forecasts, the largest buyback and dividend programme in the US and the prospect of new products — including a car — have propelled Apple’s shares up 19 per cent this year, adding more than $110bn to its market valuation.
By contrast, valuations for the next 10 largest businesses on the S&P 500 have dropped by $67bn this year, including $10bn-plus haircuts to ExxonMobil, Microsoft, Procter & Gamble and Johnson & Johnson.
A $1tn valuation is “possible in the next couple of years, and the reason I think it has this potential is really because the multiple investors are willing to pay for [Apple] is expanding,” says James Gautrey, a Schroders portfolio manager.
He adds: “This was always viewed as a consumer technology, boom-and-bust cycle type of company, like the Motorolas, Nintendos, Nokias. Right now, the innovation Apple is coming out with — payments, healthcare, Beats [music streaming] — those three parts for the consumer are really starting to lock people in.”
Sales of the iPhone jumped 57 per cent from a year earlier to $51.2bn in the company’s first fiscal quarter, far surpassing Wall Street forecasts. The phone accounted for more than two-thirds of Apple’s overall revenues in the period and buoyed profits to record levels.
Secular trends in the industry, including the shift to mobile computing, have also buoyed the company. “Apple’s iOS platform is the primary beneficiary of the shift to mobile computing, similar to the 1990s when client server applications were built on Microsoft Windows and Oracle platforms,” Deborah Koch, a portfolio manager of Northern Trust’s technology fund, says.
This has prompted a re-rating of the company’s shares and earnings potential. Analysts now project sales in the company’s 2016 fiscal year will reach $237bn — 17 per cent higher than forecasts set a year ago. Next year’s earnings are expected to hit $9.26 a share, up 44 per cent from 2014 levels and 29 per cent higher than year ago consensus projections.
“What’s propelling [Apple] and ultimately the driver of the stock is that the company is beating expectations,” says Andrew Slimmon at Morgan Stanley Wealth Management.
Apple’s valuation has remained compelling because of its growth, bullish investors add. The California company trades at 15.4 times 2015 earnings, below the 17.7 multiple ascribed to the broader S&P 500.
Apple’s buyback programme — prodded by activist investor Carl Icahn — has also acted as somewhat of a floor on its share price. Last year the company spent more than $56bn on buybacks and dividends, 6 per cent of the $900bn S&P 500 constituents put towards such returns, S&P Dow Jones Indices adds. The company’s 1.4 per cent dividend yield, while lower than the 2 per cent offered from the S&P 500, has attracted investors searching for income as yields on the longest-dated US Treasuries hover near record lows.
If you run a diversified portfolio and you don’t own Apple, you are taking a very big bet against it. That forces a professional investor into the stock
- Andrew Slimmon, Morgan Stanley Wealth Management
Technology analysts with Credit Suisse expect Apple to lift its capital return programme to $202bn through 2017, including $37bn in dividends. Ms Koch says that move will probably attract more value investors to the company’s stock as they seek out yield-bearing assets.
Despite the gains, there remains a cautious spectre to the dialogue with investors, many of whom remember the company’s precipitous 45 per cent slide in 2012-13 as concerns flared that competitors were winning share.
“While things look good now, they will at some point get into that funk again,” says Bob Doll at Nuveen Asset Management. “If you have confidence, it is where you can make some money stepping in.”
The company’s brisk rise has, however, created a conundrum for investors benchmarked to the S&P 500. Apple represents 4.1 per cent of the market cap weighted blue-chip index, far more than any other constituent. Portfolio managers have had to hold at least that much to not be underweight the iPad maker, and those who have eschewed a position in the company have missed out on its gains. Any decline in the company’s shares would present a commensurate risk.
Only five other companies have ever made up more of the S&P 500 in its history. IBM was the largest weight on the S&P 500 for six consecutive years, making up as much as 6.4 per cent of the index in 1985.
Excluding Apple, the S&P 500 tech index would be up less than 1 per cent since the year began, according to data from S&P Dow Jones Indices. The overall S&P 500’s gain would be 55 basis points lower.
“If you run a diversified portfolio and you don’t own Apple, you are taking a very big bet against it. That forces a professional investor into the stock,” Mr Slimmon says.
Twitter: @ericgplatt
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