Now, I know this market's become crazy. There are extreme valuations everywhere. I see them in the cloud stocks. I see them in the data center stocks. You can spot them in fuel cells and in financial technology. They are the reasons why you can have a market so strong and yet so few stocks truly participating: The Nasdaq's up 26% for heaven's sake, but a huge chunk of that is from Facebook (FB) , Amazon (AMZN) , Apple, Microsoft (MSFT) and Alphabet (GOOGL) .
Now, understand that these stocks are not expensive, per se, if everything goes right.
And, the amazing thing that has happened is that everything that could have gone right for these companies pretty much has gone right.
Still, the notion, on the eve of a stock split, about how Apple now sports a $2 trillion valuation, is disturbing many people.
At the same time, there is tremendous skepticism about the stock of Tesla, which is up 390% for the year and is worth $382 billion.
Now, these are staggering moves. Remember when many market followers thought it was absurd that Tesla, which makes so few cars, had a market cap bigger than Ford's (F) ? Remember when it galled people when it passed GM's market cap? And then when it passed the market cap of the combined entities they grew apoplectic?
Now it trades at five times the combined value of both and people who thought it would stop much lower have thrown up their hands and given up trying to fight the darned thing.
Before I delve into either one, I want to dispel a couple of faux concepts. First, you may think that the whole thing is farcical, that it is all because the Fed keeps pumping money into the economy, while there are few alternatives to invest in. I have no problem with that judgment. It's a major reason why the market has rallied. However, some stocks are doing a lot better than others and that's because management has done a great job. Elon Musk and his team at Tesla and Apple's Tim Cook and his coworkers have done a better job than pretty much everyone else, so they have been rewarded with lofty valuations.
Second, it always drives me crazy to hear that it's not fair or it's not right or it's gotten ridiculous. Here's what I say to that: So what. If you owned these stocks and you felt that way you could sell them tomorrow. Otherwise, here's what I see you as, a sour grapes purist, who has made a lot less money than those disciplined enough to hang on.
Now, let's deal with the matter at hand: Can the valuations, which we have established as real no matter what the Fed has done, be justified, and, more importantly can they be sustained.
Let's start with the two trillion dollar Apple.
First, I have been recommending Apple since it was $5. It is now at $504. I have said it should be owned, not traded. Even people who hate me have admitted that I got this one right.
Now this recommendation is not without trepidation. At 29-times earnings, Apple is a very expensive tech stock given its current 10% growth rate.
But hold it. Let's say Apple were to be taken out of the tech cohort and put into the consumer product category. You would suddenly have a different view of the company. It's one of the cheapest on its growth rate with a superior dividend and fantastic balance sheet -- what you look for from a blue chip. Now, not for a moment, do I want to slight Apple as a non-tech stock. Far from it. Apple offers the best technology we need with the best customer service and 99% customer loyalty.
You think Procter & Gamble (PG) has that? Colgate (CL) ? Clorox (CLX) ? Yet they all have comparable valuations. I will take it a step further: unlike those stocks, Apple has multiple revenue streams. There's the handset stream, the personal computer stream, the watch stream and the Air Pods stream, all of which add up to an almighty river. But it is a twin river, running along side a service revenue stream that seems almost, by happenstance, to have become one of the largest companies by revenues in the world. I think that the customer loyalty is so great that you might be willing to pay for news, for music, for entertainment, cloud back-up and, of course, a cut of what you might buy on the App Store.
It's the latter stream that has me convinced that after the stock splits four for one on August 31, and people who own it sell one of their shares to lock in a gain-the old pattern at least- you can buy it again.
Biggest risk? China. Revenge against actions taken by the current administration. Apple, though, has so far navigated things about as perfectly as you can, and I don't think anyone could do better. Oh, and if Joe Biden wins? You will be kicking yourself, at least on the China issue.
Tesla's much tougher. I know old Tesla-ites regard me as a heretic. I called it a cult stock that I couldn't make a judgment on. And then a series of events, like a religious conversion, everything from my wife and daughter behind the wheel to the balance sheet going from worst to first in the industry, got me behind the stock at $260. It is hard to believe that I am being attacked for being a Johnny Come Lately, given that if you listened to me you have caught about 1,700 points, not bad for a call from last November.
Should a car company really be worth almost $400 billion?
Of course not. But only limited people really regard this $373 billion enterprise as a car company. It's a tech company, just as the $313 billion Nvidia (NVDA) , or the $770 billion Facebook. The car is one manifestation of it. The truck will be another. The solar company a third and finally the battery company a fourth, something that we will take far more seriously when the get to the self-described Sept. 22 Battery Day.
That's when we might see the battery that lasts a million miles or that can go for ages without charging. With Elon Musk, who knows.
I know that the bears believe that how is it possible that a car company with one big California factory and a China factory on the way with Berlin not long after, can command such a market cap. Again, though, if you look at it as a tech company you are getting the genius of Elon Musk at a much higher price than a year ago, but $1,500 per share where it could go based on $35 in earnings power in 2025. That's certainly what we call the outyears. But it is not insane.
Where do I come out? My charitable trust has a very big position in Apple and we have already told subscribers to Action Alerts PLUS that we are going to continue owning it, not trading it. Tesla? I do fear that Battery Day could be a letdown. I bless owning it into the confab and then selling some right before just in case.
If you look at Apple as a pure hardware play, if you look at Tesla as a car company, then you are right, it's all smoke and mirrors. But if you look at Apple as the consumer product company with the best tech imaginable and Tesla as a tech company steered by a genius who has much up his sleeve, then you pay the price of admission to both. They are both stocks in the end, and stocks can break your heart. Just consider these as pieces of paper that have been benevolent and can remain so as long as the execution continues to be flawless.