Ap­ple close to over­tak­ing the FTSE 100

Partly self-seeded, but with a healthy dose of QE to help it along, James Titcomb in San Fran­cisco looks at the ti­tan’s path to $2tril­lion ‘They’re al­ready in­cred­i­bly strong, but the strong be­comes stronger and that’s ba­si­cally what this cri­sis is’

The Daily Telegraph - Business - - Front Page - By Louis Ash­worth

WITH a $2 tril­lion mar­ket value un­der its belt, Ap­ple has a new mile­stone in its sights: be­com­ing worth more than the en­tire FTSE 100.

The iPhone maker is now valued at £1.5 tril­lion in ster­ling terms, ver­sus the FTSE 100’s to­tal mar­ket cap­i­tal­i­sa­tion of £1.7 tril­lion. Ap­ple – which nabbed the ti­tle of world’s largest com­pany last month – has rapidly closed the gap with Lon­don’s blue-chip in­dex over the past few years due to a strato­spheric rise in its share price.

Shares in the Cal­i­for­nia-head­quar­tered group have soared al­most 60pc this year de­spite the pan­demic. In con­trast, the FTSE 100 is down by a fifth, leav­ing it as one of the big­gest lag­gards across the main global indices.

“Keep in mind that Ap­ple’s mar­ket cap dipped below $1 tril­lion on March 23,” wrote an­a­lysts at Deutsche Bank. “So that works out to over $6.7bn of value added for ev­ery busi­ness day since, which is stag­ger­ing.”

That is about £5bn a day, or more than the in­di­vid­ual mar­ket caps of the 20 small­est FTSE 100 con­stituents, which in­clude Mor­risons, Rolls-Royce and ITV. On Wed­nes­day, Ap­ple (plus Tim Cook, left) be­came the first US com­pany to cross the $2 tril­lion thresh­old. It is now worth nearly 20 times as much as con­sumer goods gi­ant Unilever and phar­ma­ceu­ti­cals group As­traZeneca, Lon­don’s two largest listed com­pa­nies, at £118bn and £112bn re­spec­tively.

In dol­lar terms, the gap be­tween Ap­ple and the FTSE 100 is even tighter: the Lon­don in­dex is worth about $2.2 tril­lion in to­tal. On cur­rent trends, Ap­ple will over­take the blue-chips in the coming weeks.

Forty-two years elapsed be­tween April 1976, when two uni­ver­sity dropouts formed Ap­ple Com­puter in a Cal­i­for­nia garage, and Au­gust 2018, when the com­pany be­came the first pub­licly traded cor­po­ra­tion to hit a vaunted tril­lion-dol­lar val­u­a­tion. Over that time, Ap­ple re­leased the Mac­in­tosh, the iMac, the iPod and then the iPhone.

It has taken just two years for Ap­ple to re­peat the feat. On Wed­nes­day, the com­pany’s mar­ket value sur­passed $2tril­lion (£1.5tril­lion) for the first time, climb­ing to a record high be­fore fall­ing back slightly below the thresh­old.

In the time it has taken Ap­ple to go from one to two tril­lion dol­lars, the com­pany has re­leased no ma­jor new prod­ucts. Its big­gest ini­tia­tives have been a US-only credit card, an internet TV ser­vice that has been met with mixed re­views, and a £5-a-month gam­ing ser­vice.

In the three months to the end of June, Ap­ple’s sales were just 12pc higher than two years ear­lier. Profits have ac­tu­ally fallen, from $13.3bn to $13.1bn. This year, the global econ­omy is due to con­tract heav­ily and mil­lions lose their jobs.

These do not seem like con­di­tions in which a com­pany would dou­ble in value, but an un­prece­dented com­bi­na­tion of events – many of them out­side Ap­ple’s con­trol – has made it the world’s most valu­able com­pany.

Stock mar­ket may­hem

Cen­tral banks around the world have stepped in with tril­lions of dol­lars of emer­gency stim­u­lus mea­sures to keep busi­nesses run­ning: cheap loans and bond buy­ing pro­grammes have pushed yields to record lows. As a re­sult, in­vestors seek­ing fi­nan­cial re­turns have turned to­wards the stock mar­ket, push­ing shares to record highs.

Aswath Damodaran, of New York Uni­ver­sity’s Stern School of Busi­ness, says this has sent the “im­plied eq­uity risk pre­mium” – the ex­pected re­turn from eq­ui­ties needed to jus­tify in­vest­ing in them – fall­ing from around 8pc to 6pc in two years. By it­self this is enough to lift stock prices by 50pc, all things be­ing equal, so even com­pa­nies that have not changed from two years ago have seen a boost.

“Ev­ery stock now has a lower re­turn that you can ex­pect to make, which trans­lates into a higher price you’re will­ing to pay up­front. It’s per­co­lat­ing to any com­pany that is able to main­tain its earn­ings and cash flows,” says Damodaran. “You just need to show them you can main­tain 2019 earn­ings in 2020.” Ap­ple’s price-to-earn­ings ra­tio – a mea­sure of how highly valued a firm is rel­a­tive to its fi­nan­cial per­for­mance – now sits at its high­est level since 2007, be­fore the fi­nan­cial cri­sis.

‘There’s an op­por­tu­nity to up­grade 350m of 950m iPhones. It’s re­ally the op­por­tu­nity of a decade that Ap­ple now has’

Tech’s dom­i­nance in the pan­demic

Most com­pa­nies have not been able to tread wa­ter. The US econ­omy con­tracted at an an­nual rate of 32.9pc in the sec­ond quar­ter of the year. US cor­po­rate profits fell 6.6pc year on year in the first quar­ter, ac­cord­ing to of­fi­cial sta­tis­tics, as air­lines, travel com­pa­nies and re­tail­ers all suf­fered.

The tech in­dus­try, how­ever, has thrived. Grow­ing re­liance on internet ser­vices, cloud com­put­ing and screens mean the “Fang” com­pa­nies of Face­book, Ama­zon, Net­flix and Google, as well as Ap­ple and Mi­crosoft, have largely in­creased sales and profits.

The pan­demic has ac­cel­er­ated shifts to­wards on­line ser­vices, sur­pris­ing even ex­ec­u­tives at the com­pa­nies them­selves. But it has also strength­ened the com­pa­nies’ struc­tural dom­i­nance. Ri­vals that are off­line, less cap­i­talised, or smaller, have strug­gled, so while the tech gi­ants have be­come big­ger in ab­so­lute terms, they have be­come even stronger in rel­a­tive terms.

“The one thing about this cri­sis we’ve learned is while it might cre­ate short term dam­age for these com­pa­nies, it ac­tu­ally makes their com­pet­i­tive po­si­tion stronger,” says Damodaran.

“Ama­zon has al­ready been killing brick and mor­tar re­tail. Now, that cof­fin has been nailed shut. So one of the things that these com­pa­nies have go­ing for them is the longer this cri­sis con­tin­ues, the more that com­pe­ti­tion is be­ing hob­bled and hand­i­capped, which ac­tu­ally makes the long term sto­ries even bet­ter as an in­vestor. Sam­sung is much more dam­aged by this cri­sis than Ap­ple is sim­ply be­cause it’s much more cap­i­tal in­ten­sive and has much more debt.

“They’re al­ready in­cred­i­bly strong com­pa­nies, but the strong be­comes stronger and that’s ba­si­cally what this cri­sis is.”

Ap­ple op­ti­mism

Ap­ple’s road to a $2tril­lion val­u­a­tion has not been en­tirely down to fi­nan­cial quirks, how­ever. The com­pany is gear­ing up for the re­lease of a new iPhone that an­a­lysts say could be its big­gest launch yet.

While Ap­ple has said the next iPhone will be de­layed by sev­eral weeks, that has done lit­tle to dampen en­thu­si­asm among in­vestors. It is likely to be the first de­vice that sup­ports 5G mo­bile net­works, an up­grade with ques­tion­able im­me­di­ate ben­e­fits, but that will at least be a sell­ing point in a smart­phone mar­ket that has been short on in­no­va­tion.

An­a­lysts be­lieve this could con­vince con­sumers that have been re­luc­tant to up­grade to fi­nally do so. “The death of the iPhone has been greatly ex­ag­ger­ated,” says Dan Ives of Wed­bush Se­cu­ri­ties.

“There’s an op­por­tu­nity to up­grade 350m of 950m world­wide iPhones. It’s re­ally the op­por­tu­nity of a decade that Ap­ple now has in front of it.”

Ap­ple’s dig­i­tal ser­vices such as the App Store, iCloud and Ap­ple Pay have also shown their strength in re­cent months. Ives says that Wall Street has started valu­ing the di­vi­sion at up to $700bn – on its own, more than four times big­ger than the big­gest FTSE 100 com­pany.

Crit­ics say much of this part of the busi­ness has grown be­cause of anti-com­pet­i­tive prac­tices. Ap­ple is be­ing sued by Fortnite de­vel­oper Epic Games over the fees it charges de­vel­op­ers on the App Store, and Spo­tify claims that ri­val Ap­ple Mu­sic ser­vice has an un­fair ad­van­tage by be­ing in­stalled by de­fault.

The Euro­pean Com­mis­sion, mean­while, is in­ves­ti­gat­ing Ap­ple Pay’s priv­i­leged ac­cess to the iPhone’s con­tact­less chip. Any of these threaten to clip the growth that has sent Ap­ple to its record-break­ing val­u­a­tion. For now, in­vestors seem to be bet­ting that will not hap­pen.

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