Does Apple’s $1 Trillion Benchmark Even Matter?

By Kiplinger's Personal Finance Magazine

Consumer technology company Apple (AAPL, $207.11) will forever be entwined with Aug. 2, 2018 – the day it became the world’s first company to boast a market capitalization of $1 trillion. That’s a one with nine zeros to the right of it, if you’re struggling to get a grip on the scope of the figure.

The financial media cheered the event, of course – not so much lauding Apple’s growth or the red-hot year for AAPL stock, but acknowledging the sheer spectacle of any company reaching such a milestone.

The matter does beg one overarching question, though: Now what?

Like all milestones, passing the $1 trillion mark is interesting, but it remains to be seen how – or even if – the psychology of reaching the big, round number will affect the stock’s performance going forward. Apple still has to grow its top and bottom lines, and investors still expect AAPL shares to continue to rise on that growth.

Simultaneously, a handful of veteran investors can’t help but wonder if a subconscious desire to see any company finish the race to $1 trillion will take the wind out of the rally’s sails now that the goal has been met. (To this point, Apple shares are flat.)

Not surprisingly, opinions vary widely on Apple’s future from here.

We’ve Been Here Before (Sort Of)

U.S. Steel (X) was the first publicly traded company in the U.S. to reach a $1 billion market cap, back in 1916. The race to $100 billion is fuzzier, as several companies were flirting with the figure in the mid-1980s as the technology boom was just getting going. It was International Business Machines (IBM) that briefly took the title in the late ’80s, though General Electric (GE) was the first that took $100 billion and really made it stick.

What about the half-billion mark? That was actually Microsoft (MSFT), surpassing $500 billion back in 1999, at the height of dot-com mania and at a time when Apple was struggling to find its identity.

Notice, however, that once the celebration was thrown, investors soon forgot. Wall Street is a “What have you done for me lately?” kind of place. Also note few investors know – or even care – which companies were second to meet the ballyhooed milestones.

Still, there’s something special enough about $1 trillion. To put things in perspective, back in 1970, the sum-total size of the entire market had just reached $1 trillion. Almost 50 years later, Apple alone is the same size.

Mixed Opinions on Apple

Apple’s arrival at $1 trillion has spurred diverse opinion about its meaning and impact.

Matthew J. Ure – president of Anthony Capital’s San Antonio, Texas, office – explains, “Apple’s primary ascent beyond the $1 trillion valuation proves that consumers not only love quality, but are loyal to quality. Steve Jobs’ creative genius and obsession with quality has paid massive dividends in the form of brand loyalty.”

Ure goes on to say, “With more consumers reporting lower satisfaction with the quality of Apple goods, the fact that the behemoth company that he both started and later resurrected continues to gain market value is a testament to the broad-based consumer demand for high-quality everyday goods.”

Other observers aren’t quite as enthused about the prospects for AAPL stock.

Dr. Tenpao Lee, professor of economics and finance at Niagara University’s College of Business Administration, says now that $1 trillion is in the rear-view mirror, “In the near future, Apple’s product will become a commodity gradually. Therefore, Apple will not be able to grow continuously unless Apple can continue to develop new products.” He adds, “I believe its market cap will be around its current level and stock price will appreciate at the overall market average. It will change to a value company rather than a growing company.”

There’s a fair amount of evidence to support Lee’s stance.

MarketWatch’s Mark Hulbert crunched the numbers. Going back to 1980, the Standard & Poor’s 500-stock index constituents with the largest market cap at the end of the year underperformed the index, on average, by 4 percentage points the next year.

It’s not a breathtaking degree of weakness, but it’s enough to underscore the low odds of any company remaining the world’s biggest for very long. For a short while in the late 1990s, Cisco (CSCO) boasted the largest market cap. The aforementioned Microsoft, IBM, General Electric and even U.S. Steel all at one point in time boasted the size title. All are still around – some on more solid footing than others – but clearly none kept the crown.

That’s the subtle, unspoken lesson everyone is (or at least should be) taking away from the Apple’s charter membership in the $1 trillion club: Whether Apple will be the first company to reach $2 trillion is up to no other company but Apple.

“Whatever!”

Many professional investors don’t think the milestone means much either way. They just know Apple must keep doing what it has been doing to keep growing like it has grown.

Andy Hargreaves, KeyBanc Capital Markets analyst, commented bluntly: “I’d be a fool to say there is literally no importance to it. It is a notable moment,” but “it just doesn’t mean much in a practical sense.”

Hargreaves isn’t alone. Joel Kulina, Wedbush Securities’ head of technology and media trading, fleshed out the idea in a little more detail, saying, “Beyond the headline of AAPL becoming the first trillion dollar company, I don’t think it really matters. What really matters is how Tim Cook & Co. can continue to evolve business and focus on growing services division moving forward … thus making the company and its earnings less reliant on the iPhone.”

Kulina adds that Apple’s burgeoning Services division (iTunes, Apple Pay and more) will help fuel margin growth and expand valuation multiple in the years ahead – in a way, the new kind of product Dr. Lee suggested Apple needs if it intends to continue growing.

Broadly speaking, the “whatever” camp is the most heavily populated one. Everyone’s impressed, but nobody’s under any illusion that the company’s awesome size precludes an earnings contraction. One only has to look at GE or IBM to embrace the uncomfortable possibility. It will be up to Tim Cook, and whoever comes after Tim Cook, to steer the organization around the stumbling blocks of indifference and irrelevancy.

The Last Word

For the record, iPhone sales are cooling off; that matter isn’t up for debate. If Apple wants to maintain its $1 trillion market cap, it must come up with a clear revenue-replacement plan, then articulate that plan to investors, then execute that plan successfully. Anything less than decided success with all three steps could crimp perceptions of Apple, setting the stage for a pullback.

We’ve certainly seen the impact of pessimism before. Deteriorating perceptions about the future in 2015 caused weakness in AAPL shares, though in retrospect, the future was bright – even if investors couldn’t see it at the time.

This time is different, though. This time, smartphone saturation is a stark reality, and the iPhone has become uncomfortably expensive. Also this time, with AAPL shares at record highs, shareholders are almost dangerously optimistic.

Only time will tell how the market’s all-important, iPhone-centric perception of Apple is shifting. If it’s shifting at all.

Whatever the case, Tim Cook surely is thinking as strategically beyond the iPhone today as he was before Apple cleared the $1 trillion hurdle. I doubt he checked the company’s market valuation and breathed a sigh of relief.

AAPL shareholders may not want to obsess about it either. In the end, it’s still all about earnings.

This article provided by NewsEdge.