IS IT TOO LATE TO REAP RE­WARDS OF AP­PLE’S TRIL­LION-DOL­LAR CAP­I­TAL GROWTH?

With a mar­ket val­u­a­tion now big­ger than the en­tire US en­ergy sector, is it over­stretched? Nada El Sawy re­ports

The National - News - - BUSINESS | IN DEPTH -

Since go­ing pub­lic in 1980, Ap­ple has be­come the world’s first tril­lion-dol­lar com­pany – a feat it achieved in Au­gust last year. There­fore, it was no sur­prise to see the com­pany’s mar­ket cap­i­tal­i­sa­tion – the to­tal value of its stock shares – over­take that of the en­tire US en­ergy sector ear­lier this month.

The tech stal­wart closed with a $1.17 tril­lion (Dh4.11tn) mar­ket cap on Novem­ber 14, thanks to a post-earn­ings surge, while the S&P 500 En­ergy in­dex’s mar­ket cap dropped to a cu­mu­la­tive $1.13tn. That in­cludes giants such as Exxon Mo­bil, with a mar­ket cap of close to $290 bil­lion, and Chevron at around $220bn, as well as 26 smaller com­pa­nies, such as Cono­coPhillips and Sch­lum­berger.

Ap­ple’s stock price has soared more than 66 per cent year to date to above $260 from around $158. The com­pany is “on course for 82.6 per cent gain” for the year, ac­cord­ing to a Novem­ber 14 re­search note from Bank of Amer­ica Mer­rill Lynch an­a­lysts.

The fact Ap­ple is now worth more than the US en­ergy sector is per­haps not sig­nif­i­cant in it­self as “Ap­ple’s mar­ket cap is big­ger than a lot of things”, says Noah Ham­man, chief ex­ec­u­tive of Ad­vi­sorShares In­vest­ments in the US.

But Ap­ple’s suc­cess in mar­ket cap terms brings up some key ques­tions: can the com­pany sus­tain the growth in its stock value? Are tech stocks, such as Face­book, Ama­zon, Ap­ple, Net­flix and Google (col­lec­tively known as FAANG), over­val­ued? And what does that mean for in­vestors?

While there is op­ti­mism that Ap­ple’s stock is a sta­ble buy over the long term, there is con­cern the val­u­a­tion is slightly over­stretched.

“At the cur­rent val­u­a­tion Ap­ple needs to con­vince that a new up­cy­cle of prof­its is com­ing,” says Russ Mould, in­vest­ment re­search di­rec­tor at AJ Bell in the UK. “Ap­ple has added around $550bn to its mar­ket cap since the Jan­u­ary low even though earn­ings fore­casts have ad­vanced only mod­estly … That is a lot and earn­ings growth now needs to ac­cel­er­ate and catch up.”

In Jan­u­ary, Ap­ple shares lost more than 9 per cent of their value af­ter the com­pany said in its first rev­enue warn­ing since 2002, it was be­ing badly af­fected by weaker growth, par­tic­u­larly due to the US-China trade war.

The stock price has re­cov­ered since then and Ap­ple’s earn­ings in its fis­cal fourth quar­ter, which ended in Septem­ber, topped Wall Street’s es­ti­mates for both rev­enue and profit as its wear­able prod­ucts and dig­i­tal ser­vices off­set slow­ing iPhone sales.

Net iPhone sales de­creased year-on-year to $142.38bn from $164.88bn, while ser­vices in­creased to $46.29bn from $39.75bn and wear­ables in­creased to $24.48bn from $17.38bn.

Still, to­tal rev­enue de­creased to $265.59bn from $260.17bn, prompt­ing some an­a­lysts to say other rev­enue streams will not be enough to make up for lower iPhone sales in the next year. Net sales de­creased most no­tably in China, from $51.94bn to $43.68bn.

US in­vest­ment bank­ing com­pany Maxim Group down­graded its Ap­ple stock rec­om­men­da­tion from “hold” to “sell” this month with an­a­lyst Ne­hal Chok­shi is fore­cast­ing weak­ness in both iPhone sales and av­er­age selling prices.

In a re­search note to clients, Maxim said sur­vey data sug­gests iPhone rev­enue will fall 5 per cent and op­er­at­ing prof­its will de­cline 2 per cent year-onyear in Ap­ple’s fis­cal 2020.

Maxim is the sixth com­pany to rec­om­mend selling the stock this year, ac­cord­ing to Bloomberg data, com­pared with 27 com­pa­nies with a buy rat­ing and 15 with a hold view. Maxim es­tab­lished a $190 price tar­get on the stock, im­ply­ing a down­side of about 30 per cent from this year’s high.

Mean­while, JPMor­gan Chase an­a­lyst Samik Chat­ter­jee and Wed­bush an­a­lyst Dan Ives bumped up their price tar­gets to $290 and $325, re­spec­tively.

Mr Chat­ter­jee said in­vestors have over­looked the po­ten­tial of Ap­ple’s ad­ver­tis­ing in­come, which he said could in­crease by more than five fold to $11bn an­nu­ally by 2025. Mr Ives wrote in a note to clients, “we be­lieve the tech stal­wart is still in the midst of a re­nais­sance of iPhone growth head­ing into 2020 that will fur­ther catal­yse the stock higher”.

Mr Ham­man of Ad­vi­sorShares says apps, ser­vices and en­ter­tain­ment con­tent give Ap­ple “op­por­tu­nity ahead, but also much more com­pe­ti­tion”.

He says: “I’m not con­cerned about mar­ket cap as much as rev­enue growth, ex­pense growth and com­pe­ti­tion.”

“Mar­ket cap is the re­flec­tion of in­vestor ap­petite and not the other way around,” says Salah Shamma, head of in­vest­ment for Mena equities at Franklin Tem­ple­ton Mid­dle East. Ap­ple’s val­u­a­tion sug­gests the mar­ket is ex­pect­ing the com­pany’s “dom­i­nant po­si­tion as a man­u­fac­turer, ser­vice provider and tech­nol­ogy in­no­va­tor to con­tinue to pre­vail in this cur­rent en­vi­ron­ment”.

As for tech stocks in gen­eral, Gold­man Sachs sounded the alarm in June that sky-high val­u­a­tions and in­creas­ing reg­u­la­tions could be­come a prob­lem.

“Ris­ing mar­ket con­cen­tra­tion and the po­lit­i­cal land­scape sug­gest that reg­u­la­tory risk will per­sist and could even­tu­ally weigh on com­pany fun­da­men­tals,” David Kostin, Gold­man’s chief US eq­uity strate­gist, said in a note to

clients. “The val­u­a­tion pre­mium for growth is el­e­vated to­day rel­a­tive to his­tory; soft­ware in par­tic­u­lar now car­ries the high­est mul­ti­ples since the tech bub­ble.”

Fol­low­ing the dot-com crash in 2000, blue-chip tech­nol­ogy stocks like Cisco, In­tel and Or­a­cle lost more than 80 per cent of their value. To­day, of the top 10 com­pa­nies by mar­ket val­u­a­tion, seven could be con­sid­ered tech-re­lated: Ap­ple, Mi­crosoft, Al­pha­bet, Ama­zon, Face­book, Alibaba and Ten­cent.

Mr Ham­man says he thinks some tech stocks are or are close to be­ing over­val­ued. Ap­ple may fit into that cat­e­gory, as it strug­gles with rev­enue growth and faces chal­lenges grow­ing in China.

“The dan­ger is, if you are putting money to work to­day, you might be in a sim­i­lar sit­u­a­tion that Cisco and In­tel both saw in the 2000 tech bub­ble,” Mr Ham­man says.

Vi­jay Valecha, chief mar­ket an­a­lyst at Cen­tury Fi­nan­cial

Bro­kers in Dubai, dis­agrees. He be­lieves cer­tain tech com­pa­nies, such as Ama­zon and Net­flix, are “prob­a­bly ex­tremely over­val­ued” be­cause of in­creas­ing com­pe­ti­tion and the ease of en­try into that space – but not Ap­ple. “Ap­ple is still cap­tur­ing new mar­kets, it is still com­ing up with new prod­ucts, and so it is a stock that you can hold for a long pe­riod of time,” says Mr Valecha. “I rec­om­mend Ap­ple to be at least 3.5 to 4.5 per cent of your port­fo­lio size.”

One of the big­gest fans of Ap­ple shares is War­ren Buf­fett, whose in­vest­ment com­pany Berk­shire Hath­way is Ap­ple’s third big­gest share­holder. Berk­shire holds more than 248.8 mil­lion shares in the tech com­pany, cur­rently above $65bn.

As an­a­lysts in­crease and de­crease stock price es­ti­mates, the con­sen­sus seems to be that Ap­ple is a rel­a­tively safe long-term bet – but don’t ex­pect the up­ward tra­jec­tory to con­tinue at the same pace next year.

“For Ap­ple to go up by around 85 per cent again in 2020 the mar­ket cap would have to rise by $1tn,” says Mr Mould. “It’s pretty tough to see even a com­pany as well run and well po­si­tioned as Ap­ple to gen­er­ate enough ad­di­tional profit to jus­tify that in a year, so it would be un­wise to ex­pect a sim­i­lar in­vest­ment gain bo­nanza from the stock in 2020.”

Ap­ple’s stock price has soared more than 66% year to date Reuters

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