What Apple Did to Hit $3 Trillion
Reading Time: 3 minutesIn this economy?, Apple $3 trillion: How the company defied stock-market physics.
This article is from Big Technology, a newsletter by Alex Kantrowitz.
When Apple’s market capitalization scooted past the $3 trillion mark for the second time in its history on Friday, it did so under some incredible circumstances. The company had seen sales declines for two straight quarters with another anticipated on the way. It posted an earnings miss for the first time in almost seven years in February. And its most highly anticipated product—the Vision Pro—isn’t scheduled to hit stores until 2024 and still feels like a prototype.
Yet while it seems like Apple shouldn’t be setting all-time stock market highs, and shouldn’t be up 53 percent this year, the company is much better positioned to remain at the $3 trillion level than when it first reached it, briefly, in early 2022. With a whole lot of cash, a little financial manipulation, and a growing services business, Apple has thrived in a period of rising interest rates. And now that the worst of a tough economic moment is likely behind it, it’s set to flourish in the rebound ahead.
Of all the factors that played a role in Apple’s surge, cash may be the most important. When interest rates rose from zero to more than 5 percent, profits suddenly mattered more than promise, and Apple collected plenty of the former. The company built a formidable war chest, amassing more than $100 billion in cash, and deployed it masterfully. In May, it announced a $90 billion share buyback, its second in two years, putting that money in its investors’ hands. Apple’s buybacks have distinguished it from many of its tech peers who’ve struggled with profitability.
Taking Apple’s cash into consideration, portfolio manager Patrick Burton told Bloomberg the company’s valuation made sense. ‘In my career, I never envisioned a company of this size,’ he said. ‘But then I never envisioned a company capable of generating more than $100 billion in free cash flow in a year.’ On Thursday, Citi analyst Atif Malik set a $240 price target for Apple, anticipating another near 30 percent climb.
To remain at $3 trillion, Apple will need to show sales growth or keep buying back stock, but it’s demonstrated enough strength in its iPhone and services businesses that it appears likely to reverse the trend. Even as Apple’s Mac sales dropped 31 percent and iPads sales dropped almost 13 percent in the most recent quarter, its iPhone revenue rose 2 percent, beating expectations by nearly $2.5 billion. Its services business, meanwhile, made up 22 percent of its revenue in the recent quarter, larger than every product but iPhone, insulating it a bit from the declines elsewhere. And with the iPhone 15 on the way this fall, a major upgrade cycle awaits.
When Apple first reached $3 trillion in January 2022, it was in a tenuous position. Inflation was rising and the Fed was preparing to start a campaign of significant interest rate hikes that have depressed asset prices. Meanwhile, Apple was in the thick of COVID’s Omicron wave, in which supply chain disruptions cost it billions. The company would take some time to figure these issues out, but its supply chain has improved and the Fed appears to be nearing the end of its rate raises. The near future, at the very least, looks bright.
Today, Apple makes up more than 7 percent of the S&P 500, making it a safe haven of sorts for investors who’ll keep their money these regardless of quarterly performance. The market’s health now rests, in part, on Apple doing well, creating a self-reinforcing relationship that can defy investing fundamentals. That relationship can go on for a time, but it can’t last forever. And at some point, Apple’s longer-term bets like the Vision Pro—and its long-anticipated car project—will have to show results.
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