During the dot-com-crazed 1990s, Cisco Systems became the world’s most valuable company. Widely expected to become the first company to hit a trillion-dollar capitalisation, it made it barely halfway there. When the technology sector peaked in March 2000, Cisco had a market capitalisation of nearly US$550bn.
From that peak, the entire technology sector imploded. Cisco fared even worse than the Nasdaq, losing 87% from its zenith to its nadir. Today, some 18 years later, Cisco is worth about $221bn; its average annual compounded returns from those lofty heights is a negative 2.2%/year, including reinvested dividends.
The world, it seems, would have to wait a while for its first true trillion-dollar market capitalisation company.
Now Apple is inching toward that trillion-dollar mark (its valuation hovers around $900bn). Prior to the recent 12% market swoon, Apple had been trading at an all-time high of $180.10/share. As of this week, it eclipsed that, recovering all of that February drawdown.
The trend suggests that sometime this year, Apple will become America’s first trillion-dollar company. What will drive the move to a trillion dollars? Consider these four factors as key to Apple’s continued upward momentum:
Share repurchases: Since 2012, when management first announced its intentions to do big share buybacks, Apple has shrunk its outstanding publicly traded shares considerably. As of 2013, there were 6.6bn shares available to the public. Today, that count stands at about 5.1bn shares – a 23.2% reduction.
Apple’s board of directors had most recently authorised a $210bn share repurchase programme that is expected to be completed by March 2019, according to Apple investor relations. That was before the corporate-friendly 2017 US tax reform bill was passed. I would expect that bill will encourage even more share repurchases. We should not be surprised to see a 10% or even 20% share count reduction over the next five years.
What is the effect of reducing share count? It makes the earnings of each share higher proportionately. At the same price, higher earnings equal a lower price-to-earnings ratio, and the company appears cheaper. This could have the impact of attracting value buyers, including…
Warren Buffett: The famous value investor has been notoriously tech averse throughout his career. His recent announcement that he is out of IBM and into Apple in a big way surprised some people. Buffett said Apple is now Berkshire Hathaway’s second biggest holding (after troubled serial fraudster Wells Fargo); AAPL was the stock BRK bought the most of in 2017. Although he claims he still has confidence in Wells Fargo, he cut his stake last year; don’t be surprised to see Berkshire’s Wells holdings get further reduced.
Buffett’s faithful followers often follow his lead, and are likely to add Apple to their portfolio of value stocks.
Indexing
Index buyers: The past decade has seen indexing go from a modest niche to one of the most popular styles of investing. The explosive gains in assets under management for Vanguard ($5 trillion) and Blackrock ($6 trillion) attest to the strength of passive investing.
Apple is the biggest company in the Standard & Poor 500, the Nasdaq 100 and the Dow Jones Industrial average — three of the best-known, most-followed indices. As such it captures the flow into index holdings, whenever markets rise. Apple accounts for almost 4% of the S&P 500 (its market cap is about $23 trillion); 4.9% of the price-weighted Dow; and over a whopping 11% of the Nasdaq 100 ($7.9 trillion).
New products: A slew of new and upgraded products are coming up. These usually drive the next cycle in Apple’s revenue, profits and ultimately price. New services, iPhones, AirPods, wireless chargers, over-the-ear headphones and home devices could be the spark that adds the next $100bn in market cap.
There are sceptics. There has been lots of scepticism about Apple for literally decades. The Mac site Daring Fireball has kept a running list of “claim chowder” — all of the bad reviews of iPhones, iPads, Apple Watches, etc, that (incorrectly) forecast disastrous sales. I see no reason this time is any different.
What factors could derail seeing a huge T in Apple’s market capitalisation? Two quickly to mind:
The market not cooperating: We tend to forget that the overall market and a company’s sector are responsible for about two-thirds of its gains. If tech falls out of favour, or if the overall market rolls over, it will put a trillion dollars out of reach for Apple.
Apple comes in second: The most likely challenger in the race to a trillion would be Jeff Bezos and Amazon.com. It has a market cap of $732bn — and an infinitely higher valuation — so it has a tougher road to travel. But I would not put anything past Bezos & Co, and it would not be the first time they saw a 35% gain in a year.
Cisco jinx be damned, I predict a better than 40% chance that Apple’s trillion-dollar value will occur this year. — Written by Barry Ritholtz, (c) 2018 Bloomberg LP
