Apple reaches $3 trillion valuation; markets rise to start 2022
It took Apple 42 years to become a trillion dollar company, two years to double it (August 19, 2020) and just over 16 months to hit a $US3 trillion ($4.2 trillion) market cap. The fact the latest leap has occurred without significant hardware innovation shows how quickly it has upturned its own business model.
The First U.S. Company To Reach $3 Trillion Market Cap
Instead of share prices rising as the result of ambitious new product releases, the valuation rests on Apple’s record 70 per cent gross margins in subscriptions and rapid sales growth in legacy products such as the iPhone.
The latest iPhone 13 model comes with fast 5G download speeds but no big design changes. Yet Apple is the beneficiary of a sweeping upgrade cycle regardless.
Consumers who hung on to handsets for years, uninspired by previous models, are ready to switch. Carriers such as AT&T are offering discounts for upgrades. Despite a chip shortage, iPhone sales grew 39 per cent in the past quarter, making it the company’s fastest-growing unit.
Demand is strong in the US and China. This year, Apple surpassed Vivo to become the top smartphone brand in China for the first time since 2015, according to Counterpoint Research.
There has been a change in the business mix in recent years. In the 2018 fiscal year, Apple’s “other” category of sales – which included AirPods and Apple Watches – was $US17 billion, or 6.5 per cent of total sales. In the most recent fiscal year, sales of what is now called the Wearables category more than doubled. These now account for 10.5 per cent of sales.
Apple’s Prodigious Cash Creation
What has not changed is Apple’s prodigious cash creation. Free cash flow for the past fiscal year was close to $US93 billion. But the aggressive and ongoing buyback program has lowered reserves, meaning the gap between enterprise value and market cap has narrowed.
Regulation threatens to scupper the next trillion-dollar price jump. In the UK, the Competition and Markets Authority suggests internet users are losing out because of Apple and Google’s ecosystem duopoly. Apple has already dropped app store fees in the US. In China, it is contorting itself to avoid fights.
New Products
A pipeline of new products should help to distract from such concerns. This year, Apple is expected to release its first artificial reality headset. In the metaverse, a $US4 trillion valuation could already be on the horizon.
About E. J. McKay
E.J.McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.