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With A Trillion-Dollar Valuation, Is Apple Invincible?

Daniel Howley, Trillion Dollar Apple

With Daniel Howley, Tech Editor at Yahoo! Finance

Apple Hits $1 Trillion Valuation

On August 2, 2018, Apple shares closed at $207.39.  This gave the company a market capitalization of $1.002 trillion, setting a new record.  Apple became the first company in the world to hit the trillion dollar valuation mark.

To discuss the implications of this historic milestone, Steve speaks with Daniel Howley, tech editor at Yahoo Finance.

The entire stock market is valued at about $30 trillion.  Hence, Apple stock alone accounts for a little over 3 percent of the entire market.

iPhone Drives Profit

Daniel attributes Apple’s success to their iPhone.  Apple’s iPhones have sold very well even though they are very expensive.  There are about 700 million iPhone users worldwide.  The iPhone X, for example, sells for $999 before tax.  There is strong competition in the smartphone market.  Even so, Apple managed to increase its average selling price on iPhones.  Consumers are now buying Apple’s more expensive iPhone 8+ and X models.

The Ecosystem Effect

Apple also benefits from the ecosystem effect.  iPhone users want to own Apple’s iMac, iPad, and Watch, as well as Apple TV, Apple Music, and more.  All these devices tie into one user account.  Users can seamlessly access their data, photos, videos, and apps across multiple devices through their iTunes accounts.  This creates a moat that protects the company from competitors.

Apple has what Daniel calls a “closed garden”.  You can only download apps from the Apple App Store.  Every time someone downloads a paid app, Apple gets a cut and a steady stream of money from subscription apps.

In addition, Apple makes money from accessories—$159 Apple AirPod headsets, the $399 Apple Watch, various cords and chargers, and more.

Services Contribute To Steady Monthly Profits

In parallel, Apple makes money from services it offers to its vast and loyal user base.  Add it all up, and there’s more money flowing into Apple than ever before.  This service revenue will only grow with time, as more people buy iPhones.

For example, Apple users pay monthly subscriptions for services such as Apple Music and buy or rent movies online.  Apple pulls people into its ecosystem and gets them to pay more for services, accessories, extra iCloud storage for photos, etc.

iPhone As Internet Gateway

Steve notes that iPhone’s average selling price (ASP) has increased to $740 from $699 or so.  This suggests Apple’s customers are willing to pay more for products within the Apple ecosystem.

In addition, people increasingly use their smartphones to access the Internet.  This access makes them willing to pay more for well-designed premium devices.

Competitors Struggling To Keep Up

Apple has competition, for sure.  But its competitors are struggling to keep up.

In smartphones, Apple faces Samsung, the largest smartphone maker in the world.  Samsung also makes computers, monitors, refrigerators, and heavy duty equipment.  But it’s still not a trillion-dollar company.  That’s because it doesn’t have the kind of premium that Apple carries.

In terms of market capitalization, Amazon is right behind Apple.  It lost out to Apple in the race to get to a trillion-dollar valuation.  Amazon is focused on commercial cloud services, retail sales, and content distribution.  Netflix and Hulu want to distribute personalized content.

Apple focuses on consumer cloud services, where consumers can store all sorts of personal data.

What Risks Does Apple Face?

Trends, such as Apple’s meteoric rise to a trillion-dollar valuation, aren’t always sustainable.  Apple’s stellar profits could fall if there is a drop in iPhone sales.  Eventually, iPhone sales will plateau because of limits to the world’s population and affordability.  But iPhone replacements and Apple services will continue to bring in money.

Apple shares could drop in the years or months to come.  Sales and profits, however, should continue to steadily grow over time.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: We may be witnessing a milestone in the United States stock market. This is the first time a company’s value is at or around $1 trillion, and so that’s worth talking about. But before I begin, let me say that we’re talking about this company because it’s current news.

However, in no way am I making any claim to buy this stock or sell this stock or do anything with this stock, except, I just want to present the information that is news today. Make your own research decision or talk to your advisor before making any substantial investment. All right, with that said, I guess you probably know that I am talking about Apple.

So to help me, I’ve invited Dan Howley, tech editor at Yahoo Finance. Hey, Dan.

Daniel Howley: How you doing?

Steve Pomeranz: Doing good listen, hey, in your bio it says that not only do you get to write about tech but you get to play with toys all day. Can I have your job?

Daniel Howley: It is, yeah, I am very, very, very particular about who I give this job to.

Steve Pomeranz: I [LAUGH]

Daniel Howley: So, you got to prove your mettle first.

Steve Pomeranz: I don’t think I deserve it quite frankly.

Daniel Howley: [LAUGH] Neither do I, believe me.

Steve Pomeranz: [LAUGH] Okay. All right so, Apple is hitting the $1 trillion valuation mark as we speak.

Now, I looked it up, the entire stock market is worth 30 trillion. Did I say 1 billion, hopefully I didn’t say 1 billion. Apple is 1 trillion, the stock market as a whole is 30 trillion. So that’s just a little over 3% of the entire stock market in that one stock, what’s going on?

Daniel Howley: They basically can print money at this point. What’s really interesting is how well their iPhones have done, despite the fact that they’re now selling one that goes for $1000 starting price. People have just looked past that. Apple’s average selling price last quarter for iPhones was up, which means that people are purchasing more of the more expensive devices, like the iPhone 8+ or the iPhone 10.

Steve Pomeranz: Yes

Daniel Howley: That pushes the stock up higher, it means that there’s more money in Apple’s coffers as a result. Then there’s the service side of the business which is going to just continue to grow as Apple continues to grow.

Steve Pomeranz: Makes sense.

Daniel Howley: So, that’s really where the future is for the company in my mind.

Steve Pomeranz: Well, so what you say, it’s true, or so it seems. So here’s what I’m thinking as a layperson who also owns an iPhone. So, I’m in an ecosystem, and basically I migrated over to Apple because I decided I wanted to be in that ecosystem. This is a few years ago.

Now I use IBM compatibles at work, but at home I have a desktop, I have an iMAC, a laptop, I use an iPhone and I have an iPad. So everything kind of stays within this ecosystem. So, would you consider that to be the moat that everybody talks about, the barrier to entry to break down Apple’s businesses, is that what’s working here?

Daniel Howley: I think it’s what pulls people in and what keeps them in is the ecosystem, that’s what all these companies want to do. They want you to become a member of their ecosystem so that you don’t leave, and that you’ll purchase products that work with them. So Apple is the king of this.

They have a closed garden when it comes to their apps. You can only download apps from the Apple App Store, which means every time someone downloads an app that’s paid for, Apple gets a little bit of that money. They also get money from subscription apps over time.

Then, like you said, there’s your Macs, your Apple Watches, your Air Pods, your headphones, the various cords and chargers that you need to continue to use your Apple devices. This is the way that Apple makes sure that people who join stay. Anytime that I talk to anyone who might see a new Android phone, is interested in it, or maybe a Windows laptop and they’re interested in it, they immediately say, well, I’m an iPhone user, and I kinda want to stick with that because I have all my iTunes music. Or I have all my photos in Apple Photos. So it’s kind of a way to make sure that people will stay with that one company.

Steve Pomeranz: That’s pretty strong.

So you mentioned the selling prices of the phones. Now I know that technology people watch that, it’s called the ASP, the average selling price. The numbers are something like $740 on average for a phone versus $699 or something like that. So, the average price is rising which means that people are paying more, they’re willing to pay more.

And I started to think, well, maybe because they’re starting to think of their phone not as a phone but as a computer.

Daniel Howley: Well, for a lot of people, their smartphones and the mobile Internet that comes with it, are their only ways of accessing the Internet, period.

Many people who can’t have access to landline, cable modems, or FIOS through fiber optics, Google fiber, they use and rely on their smartphones for the internet. And they might see that as the way that they want to invest a good amount of money. And I can’t blame them if that’s their primary way of interacting with the rest of the world, then you might as well get the best device out there.

Steve Pomeranz: Yeah, that’s true. So, you mentioned the services segment, which I imagine are things that are recurring all the time. Not a bit purchase like an iPhone, like a piece of machinery. But, for instance, I have Apple Music, and so I pay a fee for that so I can download everything.

I’m a musician, and that really does come in handy. What other service segments are we talking about here?

Daniel Howley: So you’ve got Apple Music, you’ve got iTunes, obviously, where people can go and purchase movies and music, things along those lines. Then you have the App Store, which is where you’ll buy all of your apps.

That’s a billion-dollar business for Apple right there, and then you have iCloud. So it’s all these services that come together that, as you become more ingrained in the ecosystem, you will spend more money on. You will see an alert on your phone every once in a while maybe saying, you’re about to run out of space on your iPhone.

If you want, you can upgrade to iCloud and get 5 gigabytes of storage. That’s a small amount of money to pay to get that kind of storage. But when you multiply it by the billions and billions of people that have iPhones in the world, it’s a big, big amount of money.

Steve Pomeranz: So who are their major competitors now? Is there anybody snapping at their heels?

Daniel Howley: Samsung is still the largest smartphone maker in the world. They’ll continue to be that way, but Apple is more than just smartphones. Samsung also makes computers but it’s not a trillion-dollar company, and it’s probably not going to be because they don’t have the kind of premium that Apple carries with it.

In terms of market cap, Amazon is right behind Apple, and it was neck and neck for a little about who was going to get to be the first trillion-dollar company. It looks like Apple is going to beat Amazon. If they get to, people around here are saying if they can hit $204 today per share, then that will put them over the threshold, and they’ll be the first trillion-dollar company in America.

Steve Pomeranz: Yeah, it’s quite amazing. Amazon comes to mind because they’ve made a huge strides in the cloud, and I know Apple is in the cloud, but they seem to be in different ways, right?

Daniel Howley: Right, so, Apple isn’t really interested in the commercial cloud, they’re more interested in the consumer cloud where you can store your own data.

So that’s iCloud, that’s Apple Photos, sharing things along those lines. Amazon wants to be the backbone of the Internet for major commercial companies. So you can look at something like Fortnite, hugely popular game, Epic runs their servers through Amazon and their Amazon Web Services. Same thing with Netflix and Hulu.

All of these big name companies run on Amazon, and that’s why Amazon is able to grow so fast now. Yes, they’re a huge e-commerce giant, they’re one of the largest places retailers in the country, but once you add in that Amazon Web Service, it becomes that Juggernaut that it really is.

Steve Pomeranz: I want to know what’s going to bring them down. These trends don’t last forever and you’ve got to go into these kinds of ideas with a jaundiced eye wondering where is the risk here? What we’ve just described coming off of this excellent quarter that they have seems to be just all positive.

There’s got to be some rot underneath there, where are they failing?

Daniel Howley: So for Apple, what they could suffer from is if you end up seeing a dip in iPhone sales. Eventually iPhone sales will plateau, you can’t continue to grow. There’s only so many people in the world, and yes, they can go out and they can buy more iPhones, but you’re going to hit a point where you’re not going to see that kind of growth that people expect.

That would potentially be offset by the services side of the business. If it can’t be, then you would see a drop in Apple and it would be a big harbinger of doom for them potentially. I don’t see that happening, I believe that the services side will pick up.

And I think that what will happen is we’ll get plenty of people going out and still purchasing iPhones, maybe not to the extent that they do today. But will eventually have an Apple that is able to pull in enough cash through services to keep them stable.

Steve Pomeranz: Okay, my guest Dan Howley, tech editor at Yahoo Finance, and we’re trying to figure this Apple thing out.

Hey, Dan, thank you so much for joining us.

Daniel Howley: Thank you.

Steve Pomeranz: If you have a question about what we just discussed, don’t forget to go to stevepomeranz.com. And while you’re there, sign up for our weekly update where we’ll send you our weekly commentaries and interviews straight to your inbox.

That’s StevePomeranz.com.