Apple’s $3tn valuation is not as ridiculous as it seems | Nils Pratley

The striking part about Apple’s $3tn valuation is that it does not look obviously wrong. Or, rather, it does not appear out of line with the racy values the US stock market places on technology companies. There is no need, for example, to engage in heroic horizon-gazing projections, as with $1.2tn Tesla, to support the enormous number. One can roughly get to $3tn at Apple via conventional yardsticks such as revenues, profits and cash generation.

The company generated revenues of $366bn in its last financial year that ended in September – $1bn a day – and made profits of $94.7bn. So the shares are being rated at slightly more than 30 times last year’s earnings. That’s punchy, but not wildly so given the rate of revenue growth (one third last year) and the fact that all the profits find their way to investors these days, largely through share buy-backs.

Meanwhile, the old scare story about “peak iPhone” has not materialised. Consumers do not seem deterred by increasingly incremental design improvements. The newer worry about regulatory threats also appears less than daunting. Apple is still clinging onto the princely rake-off fees that its app store extracts from developers, and challenges to the regime move at glacial speed. Apple also looks smarter than, say, Facebook in managing the politics.

In any case, even if app store fees were slashed, such an outcome would not be game-changing given the frantic pace of growth in other elements of the “services” line – music, TV, cloud storage and so on. Within the tech universe, Apple is diversified.

None of which guarantees that, having skipped lightly from a $1tn valuation to $3tn in less than four years, Apple will progress to $4tn just as smoothly. Higher interest rates (one of the big investment uncertainties for 2022) would seriously test the market’s love affair with tech. But $3tn is not currently ridiculous.

Flights of fancy

There’s nothing like a new year to bring forth optimistic investment thoughts about what might happen in the months ahead, and here come the airlines, reacting to a whiff of optimism about Omicron. On a lively first day of trading, BA owner IAG’s shares rose 11%, easyJet was 9% better and Wizz Air, which reported it carried almost three times as many passengers last month than in December 2020, gained 12%.

All those stocks are highly leveraged to the Covid newsflow, so, yes, a bounce in share prices is reasonable if travel restrictions could be eased – if not this week, then soon. Versus a month ago, the Omicron picture for travel, holiday and hotel companies definitely looks less dreadful if infections may be about to peak. The timing could also be ideal: it would allow confidence to return in time for Easter, the first critical period for the short-haul market.

That, at least, is one script and the one favoured by bullish analysts. It’s perfectly plausible, but the part of the recovery story that investors might worry about is airlines’ pricing power. As far as one can tell, they’re all planning to return capacity to 2019 levels as quickly as possible. That still feels a little dreamy unless prices are about to be slashed to whip up demand. Even on a gentler Covid outlook (which obviously isn’t guaranteed), one suspects the old profit margins will take a while to return.


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