Apple took just 2 years to add a trillion dollar to its market cap, but the next one won’t come easy

Apple took just 2 years to add a trillion dollar to its market cap, but the next one won’t come easy

By Tae Kim

Apple Inc. has done it again. On Wednesday, just two years after becoming the first U.S. company to boast a trillion-dollar market valuation, it became the first to top $2 trillion. Getting to the next trillion may not be such a breeze. With its shares up roughly 60% this year, Apple is among the Big Tech winners that have benefited from a “safety premium.” Investors have piled in to the iPhone maker’s shares as well as those of other technology darlings — including Amazon.com Inc., Facebook Inc. and Google parent Alphabet Inc. —  betting their business models, robust balance sheets and large cash balances would make them more resilient amid the economic fallout from the global Covid-19 pandemic.

Indeed, Apple did post impressive June quarter financial results last month on the back of strong sales, a perfectly timed lower-cost iPhone launch and a boost from government stimulus. But it faces a more uncertain road ahead. First, Apple’s valuation now embeds elevated future expectations. To illustrate, Wall Street’s current consensus for Apple’s fiscal 2020 sales ending this September is just 3% higher than its revenue two years ago. And yet, the stock price has more than doubled in that time frame, resulting in a heady valuation of about 33 times the next four quarters’ earnings.

Apple’s lofty valuation leaves little room for disappointment, but the success of its upcoming slate of products isn’t a sure thing. In contrast to the cheaper iPhone SE model that boosted its June quarter, the company is going to have to convince consumers to buy higher-priced $1,000 iPhones when it launches new 5G-enabled models this fall. And these more expensive phones may be a tough proposition with tens of millions of Americans facing job insecurity. Further, I’m still skeptical there will be new apps anytime soon that will need the faster fifth-generation wireless speeds, making phone upgrades less compelling. Finally, according to a Bloomberg News report last week, it doesn’t look like there will be much innovation coming from Apple on the services front either — just a new virtual fitness-class subscription and some modest subscription bundles.

On top of all this, Apple is facing increased regulatory scrutiny over its dominant position in the smartphone market. In June, the European Union announced it had opened two formal antitrust investigations into Apple, with one of the probes specifically looking into the requirement guidelines of its in-app purchase system. Last month, CEO Tim Cook also had to defend the company’s App Store policies and high fee structure before a landmark House antitrust hearing as well. Obviously, if either of these global regulators clamp down on Apple’s business practices, it could negatively impact its profitability.

There is no doubt Apple’s stunning ascent to $2 trillion is impressive. The climb to $3 trillion may be even more so, because it will be that much harder.

Source:-financialexpress

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