According to the news report by Bloomberg, while Apple Inc. and the market as a whole may be celebrating the technology giant reaching its huge milestone of the trillion-dollar valuation, it might now actually be as great as it sounds.
Thanks to an upbeat sales forecast, Apple’s stock prices soared, helping finally push the technology giant over the $1 trillion mark. This valuation made Apple the first US company to cross that milestone. The company also beat fellow FAANG company Amazon.com to the chase. Amazon still has another $105 billion to go before it touches that magical $1 trillion mark too.
While Apple may be a part of the FAANG group, there are differences between it and the other companies. Compared to the other companies in the FAANG group, Apple’s earnings are not nearly as impressive as the others’.
While profits look great – Apple logged profits of $56 billion in 2017, more than double of what the next biggest earnings on the Nasdaq Composite Index – the company’s price-to-earnings ratio is 70% less than other members of the technology index.
This simply means that if Apple’s income was as strong as say Facebook or Amazon’s, then company’s valuation should have been closed to $2 trillion rather than just $1 trillion.
The reasons for this are not talked about often. Firstly, Apple’s main source of income is from hardware – its iPhones, iPads, Apple watch, etc. However, Google and Microsoft sell cloud and software solutions. The hardware market is slowing down, while the software and cloud market is only just starting to blossom.
What this means is that Apple’s profit growth is actually half the rate of that of the software based companies. The pressures from a slowing hardware market is eating into profit margins for Apple and is also raising concern about how profitable Apple will continue to be.
Another factor that needs to be considered is the growth of the company in relation to the country’s economy. Basis that, most of the tech giants are actually in the minority.
Apple accounts for 4.9% of the US’s GDP. There are only two other companies that beat that number – Microsoft, which at one point accounted for 6% of America’s GDP, and General Electric (GE), which contributed a little over 5% to the country’s economy.
Additionally, data shows that 9 of 10 Americans already own smartphones, which means that the US market is already saturated. Apple has had 13 years of continuous growth in this market.
Now, Apple’s Chief Executive Officer Tim Cook, is looking for ways to move out of the hardware market and push the growth and sales of auxiliary services for the 1.3 billion Apple devices people already own. However, pushing up annual sales that are already at $200 billion is not an easy task.
According to a senior manager at Rehmann Financial in Michigan, Ethan Anderson, how is one supposed to double their money on Apple? He stated that if there is no change in Apple’s margins, then the company would need to generate another $250 billion in revenues to do so. Which is a very tall order.
Therefore, if the company’s stocks are measured against sales, then Apple actually would stand with the middle performers on the Nasdaq Composite Index rather than the top performers.
If Apple were to be compared to Amazon, there would be a huge difference in profit margins. Jeff Bezos’ online retail giant is expected to earn just $8 billion in 2018 – in comparison to the $200 billion plus expectation from Apple. However, Amazon’s price to earnings ratio is 105, which is much higher than Apple’s.