Trillion-dollar baby: Apple’s six lessons for investors
The technology giant’s market dominance has followed long periods of disappointment
Apple has been the biggest company in the world for most of the last seven years and has comfortably outperformed the S&P 500 over that period. Illustration: Dado Ruvic/Reuters
Apple recently became the first US company to be valued at more than $1 trillion. Here are six lessons for investors to digest.
You’ll find many articles explaining how you’d be a millionaire if you’d bought a couple of grand worth of Apple stock when the company went public back in 1980. Actually, you wouldn’t.
Even if you had bought shares, you’d have sold them long before they hit stratospheric levels. Apple founder Steve Jobs sold all but one of his shares when he was forced out of the company in 1985, and most Apple investors must have been tempted to follow suit as the firm languished in the 1990s. Apple shares lost more than 80 per cent of their value between 1991 and 1997.
Soon after Jobs returned to the company in 1997, the stock hit 12-year lows. Ultimately, shares went nowhere between 1980 and 1997.
Like all tech stocks, Apple did well in 1998 and 1999 but was hit hard when the dotcom bubble burst. The stock suffered its worst-ever one-day fall on September 29th, 2000, when it fell 52 per cent, and did not begin to recover until April 2003. By then, Apple had introduced the iPod, the first step in the company’s transition from being a niche player in personal computers to a consumer electronics giant.
However, don’t kid yourself with fantasies about how rich you’d have become if you’d had the chance to buy Apple stock in 1980 – 23 years of disappointment would have been too much for even the most patient of investors.
A trillion-dollar cheapo?
One trillion is a big, big number. Apple’s market capitalisation is bigger than the entire Spanish stock exchange, and bigger than the economies of all but 16 countries in the world. It’s counter-intuitive, then, to think of the company as anything other than expensive, but that’s not actually the case.
Apple trades at a discount to the S&P 500 and its price-earnings ratio is less than 70 per cent of the companies that constitute the index.
Apple is much cheaper than it was a decade ago, even though the shares have risen tenfold over the same period. Apple has earned its trillion-dollar valuation because it is, says valuation expert Prof Aswath Damodaran, “the greatest cash machine in history”.
Sceptics are entitled to ask if those enormous earnings are sustainable, but it’s another matter entirely to assert that Apple is expensive: it’s not.
Don’t play the guessing game
Can Apple remain at the top or will Amazon or Google take its place? Who will be the top dogs in a decade’s time?
You can pass the time by asking such questions, but it’s a silly game. In 1993, Financial Times columnist John Authers noted recently, IBM was the most valuable technology company; poor Apple couldn’t even make the top 10. Today, that situation has reversed; Apple is almost eight times as valuable as IBM, which is now the one just outside the top 10.
Not one of the millennials in the FT’s New York bureau, Authers noted, had even heard of the six companies immediately above Apple in the 1993 league table (Compaq, Digital Equipment, Computer Associates, Texas Instruments, Nortel Networks, and Micro Focus Software).
Things get even more obscure if one looks back on the 1980s. Then, it was companies such as Commodore, Computervision, Prime Computer and Wang Laboratories that were among those tipped for global domination.
Today, things are changing faster than ever. In a decade’s time, the top 10 list may be occupied by companies that are not even around today.
The biggest companies in the world have historically tended to underperform over the following years – the winner’s curse, as it’s sometimes known. According to Ned Davis Research, the S&P 500 gained almost 5,000 per cent between 1972 and 2013 but if you’d owned only the biggest stock in the index each year, your account would have grown by only about 400 per cent.
Apple has been the biggest company in the world for most of the last seven years and has handily outperformed the S&P 500 over that period, as have other large-cap tech stocks such as Amazon and Google. However, it would be premature to assume the winner’s curse no along applies in financial markets.
If one plays around with the dates, one can see Apple shareholders have not always had it easy in recent times. Apple shares went nowhere between September 2012 and July 2016. The stock underperformed the S&P 500 for all of the period between September 2012 and April 2018 – more than 5½ years of relative disappointment.
Apple shares may well continue to appreciate nicely in the coming years. Still, “it would make sense that there is a ceiling for the performance of the biggest names in the market”, to quote Ben Carlson of Ritholtz Wealth Management. “The biggest gains come from getting to the top spot, not after you already make it.”
Time for Faang stocks to go their own way?
Apple’s ascent beyond the trillion-dollar level came only a week after Facebook lost $118 billion in market value, easily the biggest one-day loss in stock market history. There has, says Evercore ISI analyst Anthony DiClemente, been a “dramatic bifurcation” among the biggest technology stocks during the current earnings season. Netflix and Facebook tanked; Apple and Google jumped.
For some time, investors have talked about the Faangs – Facebook, Amazon, Apple, Netflix and Google – as if they are a uniform group, five technology giants remaking the world. There is even an index, the NYSE Fang+, named after the group.
However, the Faangs are also competing against each other and a number of analysts have recently noted they cannot all grow to the sky. Google and Facebook are competing for online advertising revenues; Amazon and Google are battling for online shoppers, who tend to either look for their product using Google’s search engine or by going straight to Amazon; Amazon’s moves into the hardware market (the Fire tablet and the Echo) will be noted by Apple, while Amazon is also making its own content in an effort to pry customers away from Netflix.
The Faang stocks are now worth some $3.5 trillion, or 19 per cent of US GDP. The notion that they should move in tandem seems increasingly dubious, given that future growth surely depends on them taking market share from each other.
Don’t fall for faux certainty
“The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks”, former Bloomberg columnist Matthew Lynn said following its 2007 debut. “Apple will sell a few to its fans, but the iPhone won’t make a long-term mark on the industry.”
The problem with Lynn’s oft-mocked forecast isn’t that it was wrong – there’s no sin in that. No, it’s the faux certainty, the pretence at confidence, the illusion of the omniscient forecaster who pretends he (and it’s usually a he) can see the future.
Studies confirm people are swayed by confident forecasters, even though they tend to be less accurate than those who carefully weigh up all sides to an argument.
“Clear, confident, provocative opinions that gloss over the fundamental uncertainty and complexity of the real world sell much better than carefully circumspect thoughts on how little we really know about the messy underlying reality,” writes Dr Greg Davies, formerly of Barclays and now head of behavioural finance at Oxford Risk. “As a general rule of thumb, the more confidence with which someone tells you they know what is going to happen in the markets, the less you should believe it.”