Apple Inc.
will be a $2 trillion company very soon. The irony is this shows just how little it can afford to lose.
As of Tuesday’s close, Apple’s share price was about 1% below the level needed to exceed a $2 trillion market capitalization. Apple has enjoyed a strong run: The stock has averaged a weekly gain of 3.5% since the beginning of June, according to FactSet. Its business has proven surprisingly resilient to the pandemic. The company still generates more than 80% of its revenue by selling high-price devices made almost entirely in China, where the outbreak first occurred. Combined revenue from all those devices grew 10% year over year in Apple’s most recent fiscal quarter ended June 27. The stock has jumped 20% since those results were reported on July 30.
But Apple is also now facing an unprecedented challenge to its App Store business, putting it in the crosshairs of lawmakers and regulators on both sides of the Atlantic. The matter has escalated significantly over the past few days, as Epic Games sued both Apple and Google in federal court after the two companies removed its popular “Fortnite” videogame from their app marketplaces as Epic tried an end run around their respective payment systems. In a new twist Monday, Epic sought a restraining order against Apple to prevent the game’s removal and to keep Apple from ejecting Epic from its developer program.
Since its launch in 2008, the App Store has grown into a crucial business for Apple. Based on regulatory filings, the App Store has been the largest contributor to the growth of Apple’s services segment in three of the past four fiscal years. The services segment is now Apple’s second-largest segment after the iPhone—and the one that has delivered the most steady growth over the past four years as the smartphone business has matured. Service gross margins are also key to Apple’s overall business model, coming in 34 percentage points higher than the company’s product gross margins for the nine-month period ended June 27.
The ultimate outcome of the Epic lawsuit and regulatory probes is impossible to predict. But at $2 trillion, the market is valuing Apple as if nothing could go wrong. At that level, the stock trades at more than 32 times forward earnings—or 31 times excluding $81 billion in net cash on the company’s balance sheet. That is its highest multiple in more than a decade. It is also about double the multiple the shares fetched when Apple’s market value first crossed the $1 trillion mark in August 2018.
In other words, all a $2 trillion valuation really means is that Apple investors are now willing to pay twice as much for the same earnings outlook. With a key business under attack—and a lot of hype about a 5G iPhone being launched this fall into a weakened global economy—that’s a big bet indeed.
Write to Dan Gallagher at dan.gallagher@wsj.com
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