Apple’s valuation nears the $1 trillion mark – but is that such a good thing?

Writer, Russ Mould
Wednesday, August 1, 2018 - 12:32

“Apple’s third-quarter earnings easily beat analysts’ forecasts, as sales rose 17% and earnings per share soared by 40%, as price increases on its hardware and flourishing services and app store revenues more than compensated for sluggish volume growth in iPhones, iPads and iMacs,” says Russ Mould, AJ Bell Investment Director.

“The shares responded favourably to the upside surprise, rising by 3.5% in after-hours trading and that takes the company’s market capitalisation to $956 billion. That is tantalisingly within reach of the $1 trillion mark, although history suggests investors may have to be careful what they wish for on this front.

“Warren Buffett always used to say that market-capitalisation-to-GDP was his most reliable long-term yardstick for the valuation of the total US stock market and applying this method to the FAANG stocks as a grouping raises an intriguing question.

“Given their current markets caps, that quintet of names is valued at nearly 19% of US GDP.

Stock Market value ($ billion)* Percentage of US GDP**
Apple 956.5 5.10%
Alphabet (Google) 884.8 4.70%
Amazon 876.4 4.70%
Facebook 514.7 2.70%
Netflix 159.3 0.90%
TOTAL 3,319.70 18.50%

Source: Thomson Reuters Datastream. **Based on US Q2 real GDP estimate of $18.5 trillion from FRED, St. Louis Federal Reserve database

“That compares to the 15.5% of US GDP reached by the five biggest companies by value at the US stock market’s peak in Q4 1999, just before the technology, media and telecoms bubble burst and that particular mania came to grief.

“Anyone who owned those stocks at the market top suffered some serious portfolio pain, as they lost money on those five names for the next decade and over the subsequent 19 years they would have made just 7%.

Share price performance*
Stock Market value ($ billion) % of US GDP** 1 year 2 years 5 years 10 years To date***
Microsoft 601 4.50% -62.80% -55.70% -54.20% -47.80% 81.70%
General Electric 507.2 3.90% -7.10% -52.80% -29.20% -70.70% -73.60%
Cisco 355.1 3.70% -28.60% -75.50% -63.90% -55.30% -21.00%
WalMart 307.9 2.30% -23.10% -26.50% -23.60% -22.70% 29.10%
Intel 275 2.10% -27.00% -62.20% -43.20% -50.40% 16.90%
TOTAL 2,046.20 15.50% -29.70% -54.50% -42.80% -49.40% 6.60%

Source: Thomson Reuters Datastream. **Based on US Q4 1999 real GDP estimate of $12.9 trillion from FRED, St. Louis Federal Reserve database. ***To 31 July 2018

“It also compares to the 10.9% of US GDP aggregate valuation that was attributed to the five largest US stocks in Q3 2007, just before the Great Financial Crisis hit home, ending a bull market and ushering in a vicious bear one.

“Again, anyone who thought they were safe running with the herd, owning the biggest, best-loved names, got a nasty shock. Owning those five names since the peak also generated losses for investors over the next ten years, with only Microsoft digging portfolio-builders out of trouble.

Share price performance*
Stock Market value ($ billion) % of US GDP** 1 year 2 years 5 years 10 years To date***
Exxon Mobil 519.9 3.30% -11.60% -36.70% -6.60% -12.40% -11.70%
General Electric 418.8 2.60% -31.20% -64.10% -51.40% -33.80% -66.50%
Microsoft 301.5 1.90% -17.90% -19.90% -2.70% 134.40% 236.70%
Citigroup 252.2 1.60% -62.20% -92.20% -94.80% -83.00% -85.90%
AT&T 244.5 1.50% -19.00% -37.30% -10.50% -8.90% -19.40%
TOTAL 1,736.80 10.90% -28.40% -50.00% -33.20% -0.70% 10.60%

Source: Thomson Reuters Datastream. **Based on US Q3 2007 real GDP estimate of $15.7 trillion from FRED, St. Louis Federal Reserve database. *** To 31 July 2018

“None of this is to say that the bull run in the FAANG names is destined to end imminently, even if Netflix and Facebook both suffered sharp share price falls after their latest quarterly results and the NYSE FANG-plus index briefly dipped into correction territory last month after a 10% fall from its all-time high.

“However, it does warn against the dangers of blindly assuming that what is working now will work forever and that paying any price for a stock will be rewarded. That strategy can work well when earnings momentum is strong but it leaves little or no downside protection in the event that anything unexpectedly goes wrong, as shareholders in Facebook and Netflix (as well as other momentum darlings such as Twitter and Tesla) can attest.

“No-one really talks about the BRIC (Brazil, Russia, India and China) nations anymore, at least as a group, and investors lost their taste for the MINTs (Mexico, Indonesia, Nigeria and Turkey) almost as soon as the term was coined. The development of such acronyms owing to the popularity of a theme could in itself be a warning sign, as the experience of the BUNCH companies in the 1970s implies.

“Burroughs, Univac, NCR, Control Data and Honeywell were all kings of the technology hill over 40 years ago, as they flexed their muscles in the world of mainframes and took on the mighty IBM.

“Yet they are all but forgotten now and none of them are leading players in computing, to show that it is very hard for any firm to stay at the top for too long, especially in an industry that moves as fast as technology.

“This is why investors cannot be complacent about Apple, even if the numbers look good now. The strong app store revenues show just how sticky – or loyal – the company’s customers are and Microsoft’s positive returns for investors even from the 1999 and 2007 peaks show that software and service firms can be much more resilient than hardware ones.

“But Apple may need to keep developing its revenue streams from services since slowing hardware volumes do pose a challenge and it remains to be seen just how far the company can squeeze up iPhone prices as it launches next-generation products.”


Source: Company accounts. Based on Apple’s fiscal year to September.

These articles are for information purposes only and are not a personal recommendation or advice

russmould's picture
Written by:
Russ Mould

Russ Mould has 26 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked an equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.