Apple can power past a trillion dollars and leave Amazon eating dust

Apple has moved to within spitting distance of a trillion-dollar valuation, but Amazon is closing the gap. Will the growth continue? I think that Apple’s best days are ahead of it

Article updated: 7 June 2018 10:00am Author: Michael Baxter

Amazon moves into second spot

I was caught napping. I missed the moment when Amazon overtook Alphabet to become the world’s second largest company by market cap. Its growth continues to be extraordinary. The Amazon share price has doubled over the last 15 or so months, risen 55 per cent this year and is now at a new all-time high. Of course, if you look back further, the growth is even more impressive. Shares have increased ten-fold this decade, 16-fold since the dotcom peak and 282-fold since the trough following the dotcom crash. There is a lesson here, a best time to buy may be soon after a crash. Certainly, if you had invested £3,546 in Amazon on the right day in September 2001, then right now that money would be worth one million pounds.

Was the rise of Amazon predictable? To have invested on exactly the right day in 2001 would have been sheer luck, but this column has been describing the Amazon share price as the most exciting share price in the world for most of the time it has been in existence and that means since 2009.

The cloud has been the main driver of Amazon in recent years, and as I write, market cap is at $807 billion. Another 24 per cent and it will reach a trillion.

But I do have two doubts about the company. Doubt number one is its massive PE - 267. The markets seem to be telling us that Amazon is going to increase profits by close to 20-fold soon. I am not saying this can’t be done, but it won’t be easy.

My other doubt relates to privacy regulation. The new EU regulation - GDPR - casts a shadow on the export of data to the US, where, under the Patriots Act, the state can pretty much help itself to whatever data it wants. There is a question mark over whether data stored on the cloud, if the data is subject to the Patriots Act, is GDPR compliant. Worldwide, from Canada to Brazil to Japan, GDPR style regulation is being adopted. A massive opportunity is emerging for a cloud provider that is neither US based, nor does business in the US.

Apple

On the other hand, I think Apple (market cap $946bn 7th June, 11am BST) could enjoy another share price surge within a few years - getting the timing smack on is impossible, the surge may begin tomorrow, it may not begin for another two or so years, but I think it will.

There are four things that make Apple so exciting. I list them in ascending level of importance.

  • First off, the Apple PE ratio is a mere 18.
  • Second is privacy. As fears concerning what companies can do with our data grow, and regulation attempts to dampen the potential pervasive side of data, Apple stands out from Amazon, Alphabet and Facebook. This is a company that puts great store on the way it treats customer data, has been highly critical of the way other techs use it, and frankly, because of the way its business model works, is less reliant on data than the other giant US techs.
  • Third, the company is enjoying more and more revenue from services - and this revenue can be ongoing, in a way that sales of hardware is not.
  • Finally, the fourth and most important point relates to the next wave of technology. I don’t believe analysts who are more guarded about Apple understand a fundamental truth about technology and the role companies such as Apple play.

Apple does not invent technology, it takes something close to the state of the art and makes it more consumer friendly.

It did not invent the windows operating style or computer mouse but did invent the double-click.

It did not invent MP3 players, but did create a music player that was a joy to use and a business model that created support from the music industry.

It did not invent the smart phone, or indeed Wi-FI and 3G or 4G. But it did create a beautiful smart phone with a touchscreen just at that point when wireless internet and bandwidth speeds had made applications possible that could drive a mass market.

Ever since the iPhone was launched in 2007, the technology has not existed to create the next consumer hardware revolution.

But I believe that is set to change. This week, Apple dropped a big hint that it is developing some kind of augmented reality wearable device.

Augmented reality will be much bigger than smart phones - it will make it possible to transform long-distance communication. We will see the people we are talking to, via augmented reality glasses or contact lenses, as if they are sitting next to each other, wherever they are.

This will transform business meetings but also our personal life - within ten years it will be possible, for all intents and purposes, to have a meal with our partner, even if we are not physically near each other.

Artificial intelligence will also transform the interface between us and our wearable technology.

The market that is created will dwarf the current technology sector. All of the giant US and Chinese techs have the potential to benefit, but I would say Apple is in pole position, and if it is not the first tech to $2 trillion, I am guessing it will be a Chinese firm.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.