AAPL: The One Trillion Dollar Question

Apple is a big company – like, really big. Like about to approach a market capitalization of $1 trillion big.

The stock would need to gain 22% more in price before that happens, increasing to a ripe $193.70, according to the Wall Street Journal. Right now, the stock sits around $161.50, with a market capitalization of $820 billion.

For visual purposes, $1 billion of cash looks like this

one-billion-dollars

Apple has 820 piles of that.

That’s a mind blowing amount.

But is AAPL really worth 820 piles of cash? (Not to mention that they have $260b just in stockpile – and they plan on redistributing that in the form of dividends)

I could write a whole article about dividends, and I will. But in summary, dividends concern me, especially for a company like Apple. Dividends mean that they don’t plan on growing.

The company’s financial metrics have been on a steady decline for the past few years. Return on Assets sits at 11.5% for 2017, down from a 15.9% average since 2012. Return on Capital is down 7.4% from a 5 year average of 24% to 16.6% for 2017. Return on Equity is down 1.7% from average at 36%. (Information via SP Capital IQ)

Apple began 2012 with gross margins of 43.9%. They now have margins of 38.5%.

Gross profitability sits at 24.9%, with gross profits of $86.068 million divided by total assets of $345.178 million. (Information via SP Capital IQ)

But I think that if the company can deliver these 3 iPhones tomorrow and with gusto, then the company should be looking at some pretty rich profits.

apple

Image via the Arora Report

There are a few key reasons why the Apple fad isn’t going to go away very quickly.

  1. This new iPhone will reshape the identity of the iPhone. It will provide a whole lot of new tech features, and the ability for people to really showcase their wealth which will be key in luxury oriented markets like China.
  2. Supplies are limited. Everyone knows about the shortages in production that AAPL has had with many of its products. It makes it a “get it while you can” product, and a lot of people positively respond to that selling strategy.
  3. Apple is in a market that they can participate in “conspicuous consumption”. The more expensive they make a device, the more people will lust after it. They have a  “Veblen Good”

Veblen goods are goods that are “not purchased for inherent value but for the reaction others will have to the buyer’s ownership of the product” through conspicuous consumption.

Having an iPhone is a Veblen good because it signals that one belongs to the Apple community (and might be a showcase of wealth) which is a very big deal to some people.

Such a big deal that they might be willing to pay the $1,000 price tag for the iPhone X, to be revealed 9/12/17.

Apple needs people to pay that price tag. But only 2% of those interviewed by Marketwatch.com said that they would be okay with a price tag of $1000+. 78% were more comfortable with around a $800 price tag.

About 2/3rds of Apple’s revenue comes from the iPhone, so if only 2% of people are willing to pay that price, that means some SHARP DECLINES in revenue.

Picture1.png

Image via Six Colors 

So if the phones are a flop, that’s not good. In 2016, iPhone sales declined for the first time, and revenue decreased by $18.3 billion. That’s MASSIVE.

Apple has to have the strength to weather the storm, especially as consumer spending decreases (as it will eventually, when we enter the next phase of the business cycle). It’s how the economy WORKS. And they have to be prepared for that.

An even more concerning fact is that Apple CEO Tim Cook selling $43 million of stock. CEOs sell shares when they expect the stock price to decrease. So why would he be selling off his company 12 days before the biggest announcement of the year?

Also, Apple has yet to get into China, even with their luxury items. China uses something called WeChat, which is an operating system that acts above iOS or Android, so China literally has no use for Apple at this point. They just need a phone, and no way would they pay premium prices for something like iPhone X when they don’t use all the features.

As you can see by the graph below, Android dominates globally.

apple sucks

Image via International Data Corporation

Apple also needs to get into India. But once again, the price tag is a huge barrier. India has some incredibly poor sections,with 708 million people without access to basic sanitation, which prevents them from even thinking about buying the iPhone X.

Apple needs to get out of the USA and expand into global markets if they ever want to see that $1 trillion market cap.

The stock is up 37% on the year, responding as it normally does before the big September iPhone reveal. (Information via Cap IQ)

Would it make sense to take profits and run? Or would it be best to sit through yet another supercycle, and hope that these 3 iPhones and the other products can push the company back to growth territory, even though all metrics point to declining growth?

Apple might be one of those “buy the rumor, sell the news.”

Only time will tell what happens, but one thing to remember is that “Love is expensive, and infatuation gets reflected in a company’s valuation.” (Contrarian Edge) Apple die-hards will buy the products no matter what.

But between the higher price tag, complex manufacturing requirements, and complexity of forecasting demand, Apple has a lot of hurdles to jump, both domestically and abroad.

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