Why Apple Deserves a Trillion-Dollar Valuation
Apple’s market cap crossed $800 billion for the first time two weeks ago. Not long ago, we predicted that Apple would be the world’s first trillion-dollar company. We’ve had ups and downs since then, but now we’re closer than ever.
We think Apple deserves the largest valuation of any company in history. Investors are finally giving the company credit for its defensible, recurring business of selling high margin hardware and software, layering in Services revenue growing in the high-teens. While not a traditional recurring business with quarter-to-quarter predictability, 600 million+ iPhone customers with 96%+ satisfaction rates generate predicable revenues over longer periods of time.
Year-to-date, shares of AAPL are up 32.3% vs the Nasdaq at 13.9%, as of this writing. A key reason for the stock’s outperformance is mounting expectations for the iPhone X coming this fall, which should reaccelerate growth in the iPhone business. We expect iPhone units to be up around 7% y/y for the iPhone X cycle (FY18) and flattish in 2019 and 2020. The stock currently trades at about 15x forward EPS, which is in line with historical multiples of ~16x heading into new iPhone cycle launches (iPhone 5 and iPhone 6). The stock only traded at around 11x forward EPS heading into iPhone 7, which was viewed as more of a stepping-stone to the iPhone X.
More importantly, the iPhone X will be Apple’s first meaningful step into augmented reality (AR) as the new phone will have the ability to map the real world through new cameras and sensors. Google did this first with its Tango smartphone platform, but Apple will take it mainstream and could have over 100 million AR-enhanced smartphones in the market by this time next year. As we wrote previously, Apple is well positioned to be one of the major winners in AR. Design remains their unique core competency relative to other competitors like Google and Microsoft, and they will also have an early-mover advantage in AR-enhanced smartphones through the iPhone X.
A note of caution from years of seeing iPhone product cycles: A near-term pull back in shares may happen as we get closer to the typical late September iPhone launch date. Investors notoriously ‘sell on the news’ as Apple’s product pipeline is well telegraphed at this point and the company typically does not announce unexpected products.
Beyond trying to time the public markets, which we’re avoiding now as venture capitalists, Apple remains in a strong position. The iPhone business should show growth this year and relative stability over the next several years. The company should be able to repatriate a meaningful amount of its overseas cash in the next year. The Services business should continue to grow in the low-double digits for multiple years, providing incremental high margin software revenue driven by growth in the iPhone user base. Plus, there is optionality in Apple’s development of AR glasses, AirPods as hearables, and the potential for an Apple car.
Bigger picture, large cap tech is a great place to be. Apple’s market cap makes it king, but Google, Facebook, Amazon, Microsoft, and, our current favorite, Tesla, have all performed well in the current optimistic market environment. These six companies are investing heavily in the core focus themes of our fund that we see as the future of computing: AI, robotics, VR, and AR. They, too, see the next wave of technology coming and Apple, in particular, is well positioned to benefit.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.