One Last Thing

Fifteen years after Steve Jobs changed the (tech) world by unveiling the very first iPhone, Tim Cook this week presented the latest version of the line-up. Since its introduction, Apple sold more than two billion of the devices, catapulting its share price 6756% and outpacing the wider US stock market ^[1] twentyfold. Measured by market capitalisation, Apple is the biggest publicly-traded company in the US. Its size exceeds the aggregate value of the 100 largest public companies in the UK^[2] . How could it possibly grow from here?

Investors seem to suggest that it still can. In fact, they are willing to pay a premium for Apple’s stock, betting that it will. Measured by the price-to-earnings ratio, a metric many analysts rely on, the price of an Apple share is currently 29 times its next year’s expected profits, compared to 20 times for the average US-listed company^[3] . Such a premium can signal various sentiment, but one thing is clear: investors expect Apple to grow faster and more sustainably than most of its peers.
 

Buffet’s Nightmare

Valuations matter. A popular – and intuitive – notion in investing is to seek out cheap stocks and avoid expensive ones. Pricier companies, so the theory, have less room to grow, a higher risk of disappointment and thus an elevated chance of leading to losses. In short, Warren Buffet would not be a buyer. Nonetheless, companies such as Apple have been defying this theory for decades. If anything, its stock valuation was even loftier before the iPhone’s debut, with shares trading at up to 80 times its projected earnings in the three years leading up to the original keynote. And yet, those who invested prior to the announcement witnessed immense returns as Apple met expectations and eventually grew into its earnings potential.

Thus, Apple’s track record makes a convincing case. Its designers managed to attract customers with innovative products with a premium feel. They bind users with a seamless and constantly evolving ecosystem. Once committed to Apple, enthusiasts rarely switch, even when presented with superior hardware from competitors. Yet, simply milking this cash cow will not suffice. Investors expect more; a thirst for innovation that may prove hard to quelch. The company’s forays into emerging technologies like virtual reality and artificial intelligence are not only novel; they are vital. As one of the biggest enterprises in the world, Apple certainly has all the resources to succeed: money, talent, and first-mover advantage. But will this be sufficient to maintain its lead in the ongoing race for technological dominance and stock market superiority?

The answer, as so often, lies within investors’ own perspectives. Those who had faith in the company in 2004, when its valuation was higher than now - even without the proven track record of the iPhone, iPad, and Apple Watch - already reaped exorbitant rewards. Current investors may be banking on the potential of upcoming products like the Vision Pro or innovative applications of artificial intelligence. Some merely find reassurance in the enduring strength of a behemoth like Apple in the economic storm that has been brewing in the recent years. Others may opt out, not seeing a path for further growth from such a high level. Still. Impossible, it is not.