Apple’s move towards being the first company in his history to be valued at more than $1trn should not be taken as an overwhelming positive development, according to AJ Bell’s Russ Mould. 
The technology behemoth’s third-quarter earnings report saw Apple post a 17 per cent increase in sales and a 40 per cent rise in earnings per share after price increases on its hardware and growing services and app store revenues offset sluggish volume growth in iPhones, iPads and iMacs.
The company’s share price rallied in response to the surprise good news, rising by 3.5 per cent in after-hours trading after the update was announced on Tuesday and taking Apple’s market capitalisation to $956bn. The session ended with the firm’s shares priced just under $200 – and only need to break $203 to hit $1trn in market cap.
Performance of Apple over 5 days
Source: Google Finance
Markets.com chief market analyst Neil Wilson expects Apple to eventually reach this point, especially if investors rotate some of their FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) exposure towards the more attractive Apple.
“Although it would be a bit of a stretch, a push up to the $1trn mark today is a possibility – it’s only a matter of time before it achieves a valuation of $1trn. If it does, cue some big profit taking but it would be a moment to savour for [chief executive] Tim Cook,” he said.
“Rather like the Dow at 25,000, you kind of get the feeling investors will conspire to nudge it over the line. If you’re in FAANGs now I don’t see why you wouldn’t rotate some equity out of more exposed companies like Facebook and Netflix and opt for relative safety in Apple, whose multiples remain well short of FAANG peers.”
However, AJ Bell investment director Russ Mould doesn’t see such a move as being completely positive and argued that “history suggests investors may have to be careful what they wish”.
Mould said: “Warren Buffett always used to say that market-capitalisation-to-GDP was his most reliable long-term yardstick for the valuation of the total US stock market and applying this method to the FAANG stocks as a grouping raises an intriguing question.”
Given their markets caps as of 31 July 2018, the five FAANG stocks were valued at just over $3.3trn – which equates to 18.5 per cent of US GDP. When it was valued at $956bn, Apple alone was worth more than 5 per cent of the country’s GDP.
If we go back to the fourth quarter of 1999, the five largest stocks in the US market were Microsoft, General Electric, Cisco, WalMart and Intel. Together, they were equivalent to 15.5 per cent of the US economy but suffered when the technology, media and telecoms bubble burst.
“Anyone who owned those stocks at the market top suffered some serious portfolio pain, as they lost money on those five names for the next decade and over the subsequent 19 years they would have made just 7 per cent,” Mould noted.
Performance of biggest stocks in 1999
Source: AJ Bell, Thomson Reuters Datastream. Based on US Q4 1999 real GDP estimate of $12.9 trillion from FRED, St. Louis Federal Reserve database. To 31 July 2018
Likewise, the largest US companies in the third quarter of 2007, which was just before the global financial crisis, were Exxon Mobil, General Electric, Microsoft, Citigroup and AT&T. They were worth 10.9 per cent of the US economy but were hit hard by the global financial crisis and it is only the strong performance of Microsoft that has kept the portfolio afloat.
Performance of biggest stocks in 2007
Source: AJ Bell, Thomson Reuters Datastream. Based on US Q3 2007 real GDP estimate of $15.7 trillion from FRED, St. Louis Federal Reserve database. To 31 July 2018
“None of this is to say that the bull run in the FAANG names is destined to end imminently, even if Netflix and Facebook both suffered sharp share price falls after their latest quarterly results and the NYSE FANG-plus index briefly dipped into correction territory last month after a 10 per cent fall from its all-time high,” Mould said.
“However, it does warn against the dangers of blindly assuming that what is working now will work forever and that paying any price for a stock will be rewarded. That strategy can work well when earnings momentum is strong but it leaves little or no downside protection in the event that anything unexpectedly goes wrong, as shareholders in Facebook and Netflix – as well as other momentum darlings such as Twitter and Tesla – can attest.”
The investment director also argued that the fact investors have started referring to these five stocks by the FAANG label could be a cause for concern. He noted that few serious investors still refer to the so-called BRIC nations of Brazil, Russia, India and China as a homogenous group, while the trend of lumping Mexico, Indonesia, Nigeria and Turkey together as MINT economies ended “almost as soon as the term was coined”.
“The development of such acronyms owing to the popularity of a theme could in itself be a warning sign, as the experience of the BUNCH companies in the 1970s implies,” he said.
Burroughs, Univac, NCR, Control Data and Honeywell were the darlings of the technology industry more than 40 years ago and took on IBM in the mainframe space. However, not one of them remains as a leading player in computing today and Mould said this demonstrates how hard it is for any firm to stay at the top of any industry for a prolonged period – particularly in the fast-paced tech sector.
“This is why investors cannot be complacent about Apple, even if the numbers look good now. The strong app store revenues show just how sticky – or loyal – the company’s customers are and Microsoft’s positive returns for investors even from the 1999 and 2007 peaks show that software and service firms can be much more resilient than hardware ones,” he concluded.
“But Apple may need to keep developing its revenue streams from services since slowing hardware volumes do pose a challenge and it remains to be seen just how far the company can squeeze up iPhone prices as it launches next-generation products.”