So, Apple's (AAPL) market cap hits a trillion dollars. Does it matter? You bet it does. It matters more than the Chinese saying that they won't stand for a 25% tariff increase - as if they really have any leverage giving their ridiculous balance sheet, slowing economy, and wilting stock market. It matters more than whether the ten year crosses through 3%. In some ways, at least today, it matters more than the U.S. economy.
Here are 10 reasons why the trillion level is meaningful.
First, it would have been inconceivable even a few years ago. That any company could ever be worth more than $500 billion was considered to be dangerous, foolhardy, a sign of a pending crash.
You know why? Because in March of 2000, at the height of the dot com mania, Cisco's (CSCO) stock traded at $550 billion. The backbone of the internet sold at 120 times earnings. It lost almost three quarters of its value within one year. That decline's been etched in peoples' minds ever since.
But once that price was breached and we didn't crash, it's been off to the races for a host of companies, especially FANG. However, there is one big difference. Unlike FANG's components, Apple's stock has never had a hideously high multiple. In fact, it crossed the trillion dollar line with a 15 price-to-earnings multiple on next year's earnings.
Second, Apple has been misunderstood ever since its product line became so broad as to qualify for an ecosystem. Once it became an ecosystem the company's been able to charge for different services like picture back up as well as a cut of the applications that you buy in the app store. The service revenue stream is valued more highly than an episodic cellphone issuance and is far more secular in growth. A subscription business is perhaps the most reliable and predictable form of revenue and therefore deserves among the highest not the lowest P/E. It's a main reason why the stock could trade through the trillion dollar mark.
Three, Apple is not a tech company. It is a consumer products company with the best possible tech and therefore the greatest possible consumer loyalty. There are virtually no products other than Apple than have a 96% consumer loyalty and 98% satisfaction for the highest end phones. Consumer product companies rarely sell at less than 20 times earnings. The stock of Clorox (CLX) , which have owned, sells at 22 times next year's earnings. The stock's up seven because the company guided for growth between 2 and 4%. By almost any guise Apple is a double digit grower and the service stream is growing at 31%. But lets say Apple's as lasting as bleach, charcoal, salad dressing and cat litter. If we give it a Clorox multiple on next year's earnings Apple belongs at $300. And remember, 2 to 4% growth for Apple is ludicrous. What has to change to get Apple the recognition it deserves? One of the myriad consumer products analysts has to take over coverage from a hardware analyst so that the stock can be explained better. That would be the clincher because it is, in the end, the price to earnings multiple, not the market capitalization, that controls.
Four, the total addressable market is much bigger than Apple's share currently in every single product it sells. Take personal computers. Most companies do not give their people Apple products. But the moment you let them use their own preference PC, as Salesforce.com (CRM) did recently, they overwhelmingly elect Apple over all others. Can you imagine if IT departments got in synch with the preferences of all who work with their tech? You could see an acceleration in business that would be unrivaled by any other in or out of tech. Apple's also only the third largest cellphone company in the world. Samsung shipped 78.2 million phones in the first quarter of 2018. Apple shipped 52 million. Now the price point is higher for Apple, of course, but the fact is I think that given Apple's customer satisfaction rate, and the desire by phone companies to get customers, a huge percentage of Samsung owners might switch if enticed. Lots more potential customers.
Five, Apple has so much cash that it is perfectly reasonable for the company to sit there and buy back a huge amount of stock every day. And that's basically what they do. With $243 billion in the bank, Apple's biggest constraint according to CFO Luca Maestri, is that the government will not allow any company to buy as much as it wants on a given day. These volume restriction have, at times, put a lid on what Apple can buy back. When I pressed Luca on this he called the stock undervalued. When the guy in charge of the buyback thinks his stock is undervalued you better believe Apple will be there "underneath" buying as much as it can. That's one of the reasons why we don't see big swoons any more in the stock. Big declines are opportunities because of it.
Six, Apple's management is very non-promotional. I think that's a reason why Apple hasn't gotten to this level earlier. Tim Cook doesn't care nearly as much about the stock market price than he does the quality of the product. If he thinks the quality is subpar it will not come out. He's taken big risks: cord configuration changes, ear buds, price points and all of the decisions have been right. All that said, he did have enough of those who kept saying Apple's best days were behind them and he came to the set more than 100 points ago to tell us why. It was the bottom after a long swoon and it was precisely when you had to pick some up.
Seven, skepticism has played a huge role in this rally. People are constantly trading in and out of Apple's stock on every component data point even as I have told you over and over again to own it not trade it. The stock has spooked out so many. China worries; price points; component scares. It never ends, still hasn't. But that wall of worry is something that great stocks climb and few have climbed it better than Apple.
Eight, we always heard that the law of large numbers would stop Apple's stock price. It just can't go on. We heard that paying up here would be violating the principal that the most dangerous words in the English language are "this time it is different" meaning "that this time it is different I can pay up this high because this time it is different." Turned out that the dangerous words were "this time is not different" because you would never have paid this high.
Ninth, a trillion ain't what it used to be. Inflation has made it so that a trillion dollars, as big as it is, should not be viewed with a backward lens. When companies initially crossed the $100 billion barrier it was considered to be wrong, stupid, dangerous. Adjusted for inflation from back then, a trillion's not something out of hand.
Finally, ten, soon Apple won't be an oddity. You are going to see perhaps Microsoft (MSFT) and Amazon (AMZN) in the same club. When that happens it won't be as big a deal, but for now, the charge to a trillion that Apple's made is a very big deal.
Like the iPhone X, Apple's stock deserves to trade for what people will pay for it. A trillion dollars it is.