The word that explains why $2 trillion Apple is still undervalued.

Insane or common sense: Apple hits $2 trillion, but the upside is still not understood

Article updated: 25 August 2020 8:00am Author: Michael Baxter

Apple’s share price has increased by five per cent since the middle of last week. A jump in the Apple share price is nothing unusual, but there is something quite stunning about this particular increase. This latest five per cent increase in the share price occurred after it passed the two trillion dollar valuation.

As I write, Apple shares are at a new all-time high, and its market cap is $2.13 trillion. Piddly companies like Aramco are left eating dust in the league table of the world’s largest firms.

By the way, before I go any further, I must tell you some good news concerning myself. I recently bought an iPhone pro-max 11. And what a joy it is. These days I do most of my work on my iPhone. Occasionally, I have to use my PC, and things immediately get stressful. Everything slows down. Word randomly seems to change the way it formats bullet points, things stop working, and the temptation to throw my PC out of the window becomes almost too much to resist. Then I return to my iPhone; my fingers glide across the screen, sometimes I think predictive text seems to know me better than I do — joy returns.

So that’s the iPhone. Sales of this product certainly seemed to justify Apple’s trillion-dollar valuation of two years ago. I am a great believer that the first step in deciding whether a company is any good is in determining how good its products are. Now, I am not allowed to recommend shares, but I can recommend consumer products, and I wholeheartedly recommend the latest iPhone models.

And actually, the smartphone — and not just the iPhone — has in my view changed both the world and us. And if you can forgive me for getting a sneaky little plugin, in my new book Living in the Age of the Jerk, the smartphone is the first example of a fifth industrial revolution product, which is to say products that change us. They can augment us or even reduce us. But for better or ill they change us — human beings, like an artificial mutation to our species.

Is a trillion dollars a lot of money for a company that has helped change what it is to be human? I don’t think it is.

But Apple isn’t worth a mere trillion dollars; it is now worth $2.1 trillion. Is it worth that?

I think it is, and I think it is for the reason that is not understood about how disruptive technology works. But before I get into that, let’s look at some hard numbers.

Hard numbers and some thoughts

Apple’s share price has increased 13-fold over the last ten years, by four-fold over the previous five years and by more than 50 per cent this year.

Apple’s P/E ratio was around ten five years ago, and Apple cynics kept saying it was overvalued, that it would fall victim to the problem of large numbers— that its scope for growth is limited. Well, they were wrong.

Today’s Apple P/E is a tad over 30. That does seem on the high side, but I think the company can carry on growing.

Revenue and profit growth may slow for a few years, but I reckon its super-rapid expansion will begin again before this decade is out.

The company now has $207 billion in cash holdings, l and has spent $67 billion on share buybacks.

The company’s revenue from services has increased $4.4 billion a quarter in 2014 to $13.35 billion in Q2 of this year. 

Service revenue now accounts for 14% of Apple’s revenue. This is important as it is more reliable than revenue from sales of hardware, and it is highly profitable.

As part of my new phone’s contract, I get a free subscription to Apple TV for a year. As a consumer, I can say that the content offering is limited, but very high quality. I can’t wait for the TV series based on Isaac Asimov’s Foundation Series. I wonder how much money Apple will sink into the service. A few years ago, there was a rumour it was looking at buying Disney. Maybe it could buy Netflix. It could afford to buy both.

I do expect revenue from services to continue to grow. If the growth trajectory seen in service revenue since 2014 can continue, its $2 trillion valuation is easily justified.

The reason and the word that is still not understood

Disruptive technology does not change the world gradually; it does so super-fast. The iPhone was announced in 2007 when Apple’s share price was roughly a fiftieth of the current price.

Before 2007, technology was not ready for an iPhone. Wifi was rare; processing speeds probably weren’t fast enough.

Commoditisation of components was not sufficient. Once all three of these critical prerequisites for smartphones to become truly popular were in place, there was a tipping point, and the technology took off at an extraordinary pace.

And that’s the word critics don’t get — tipping-point. I suppose you could call it a phrase.

Critics say Apple isn’t as innovative as when Steve Jobs was at the helm, but the critics don’t get it; they don’t get the point about the tipping point.

Technology advances have a speed limit. It takes time for technology to reach a level when it can become a mass consumer product.

The next big breakthrough, the one that will change the world even more than smartphones did, will be when AI and augmented reality both reach a tipping point. Then the technologies will converge.

Later this decade, smartphones will offer coverage with wearable tech, AI and augmented reality will be part of the offering. Real-time voice language translation will mean we can fluently communicate with people who speak languages with which we are unfamiliar. AI will act as a contestant nudge, reminding us to do things, telling us if something we have heard or read is apparently untrue and tell us who people are when we can’t remember. And we will communicate hologram to hologram; the physical distance will be a minor inconvenience to long-distance communication.

Once the conditions are right, probably at the end of this decade, and we reach this tipping point, I expect the market to take-off even faster than smartphones did.

And I think Apple is in pole position.


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

Michael Baxter portrait photo
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.

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