(Reuters) - Shares in Apple Inc (AAPL.O) edged higher on Friday but stayed close to the $1 trillion valuation milestone the iPhone maker reached a day earlier, even as Wall Street predicted more gains.
An electronic screen displays the Apple Inc. stock price at the Nasdaq Market Site in New York City, New York, U.S., August 2, 2018. REUTERS/Mike Segar
After becoming the first $1 trillion publicly-listed U.S. company on Thursday, Apple last traded up 0.1 pct at $207.57 after falling as low as $205.48 and as high as $208.74, as it oscillated around the $207.0425 price that marked the record market cap.
Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, said Apple’s lukewarm Friday was a temporary pause for the stock rather than a sign it could lose ground.
“It’s like the horse that crosses the finish line and says I’m totally wiped out,” said Morgan, whose firm holds more than 200,000 shares in Apple.
“There was a strong earnings report on Tuesday. All the enthusiasm around the $1 trillion market capitalization, both those things have just exhausted the current trading in Apple. And it’s Friday. The whole week was engulfed by Apple,” he said.
Apple still looks relatively cheap even with a trillion dollar valuation. Its shares trade at less than 16 times earnings estimates for the next 12 months, according to Morgan, who said he would be comfortable with a multiple of 18 or 19 for the stock.
“That’s a reasonable level so I don’t feel there’s any risk that people will say its trading at a $1 trillion let’s put the brakes on this ... If it was Amazon or Netflix that were hitting a trillion, then we could have that conversation,” he said.
(Interactive Graphic - Apple hits $1 trillion stock valuation: tmsnrt.rs/2Mg6mZ8)
Netflix (NFLX.O) currently trades at 93.8 times estimates for its earnings in the next 12 months while Amazon.Com’s (AMZN.O) multiple is 83.74.
“If Apple trades at 20 times earnings that would be crazy,” he said, estimating that Apple shares could go as high as $220 by year-end.
Amazon, Microsoft (MSFT.O) and Alphabet (GOOGL.O) are in a tight race to become the second U.S. company to reach the $1 trillion milestone.
Most sell-side analysts also seemed to see $1 trillion as just one milestone on Apple’s way to greater gains as the median price target for the stock is $218.50 and the mean price target at $215.46, according to data collected by Thomson Reuters.
The highest price expectation for the stock is Brian White’s $275 target, which would mean a $1.3 trillion valuation, according to the analyst from Monness Crespi Hardt, who says he was first on the Street with a price target that reflected a $1-trillion valuation.
Despite the record valuation, White said, “Apple is one of the most under-appreciated stocks in the world.”
Trip Miller, managing partner at Gullane Capital LLC in Memphis, said Apple “should trade much higher.”
“They are so dependent on one product for such a huge part of their revenue that I believe that’s why it gets that discount,” said Miller whose firm also owns Amazon shares.
(Graphic: Apple revenue by segment, product units - tmsnrt.rs/2LNgw6q)
But as enforcement loosened, notably under the Reagan administration, buybacks began to increase. Now, they are omnipresent. A Roosevelt Institute study released on Tuesday found that corporations spent 60 percent of their net profits on stock buybacks between 2015-2017. Buybacks have continued to boom in the wake of the $1.5 trillion tax cut passed in December. J.P. Morgan estimates that $800 billion will be spent on buybacks in 2018, obliterating the previous record of $587 billion in 2007—a spree that ended when the economy collapsed.
The goal of buybacks is straightforward: They prop up share prices and reward shareholders by increasing the value of the piece of the company that they own. There is no conclusive evidence that buybacks boost share prices in the long term, but as The Motley Fool explains, “In the near term, the stock price may rise because shareholders know that a buyback will immediately boost earnings per share.” But buybacks may not be a particularly efficient way to prop up a share price. Earlier this month, The Wall Street Journal found that “57% of the more than 350 companies in the S&P 500 that bought back shares so far this year are trailing the index’s 3.2% increase.” (Apple’s stock, however was an exception—its shares had jumped 11 percent at the time of the report.) Nevertheless, given the amount of pressure that CEOs are under, and the fact that buybacks are applauded by the shareholders that profit from them, it’s no wonder that public companies in the U.S. have spent the majority of the windfall they received from last year’s tax cut buying back their own stock.
Because companies are spending so much on buybacks, they’re neglecting to invest in their workers or their products. “Stock buybacks undermine the productive capabilities of companies and their ability to generate new products that compete on the market, and this is going to, at some point, show up in stock price,” University of Massachusetts professor William Lazonick, who studies buybacks, told me. Buybacks, as the Roosevelt Institute study found, also keep wages low by giving money to shareholders rather than investing it in workers.
All of this is direct result of the short-term focus of the economy. “I attribute it a lot of it to the financialization of the economy,” Lazonick said. “Once you’re willing to spend two or three or four billion or more a year on buybacks for a large company, you start becoming much more willing to lay off 5,000 people even in a prosperous period to pump your stock price up.”
Tim Cook, Apple’s CEO, has argued that stock buybacks are ultimately good for the economy, because investors have to pay capital gains tax when they sell stock. This is something of a novel argument—it was made in a MarketWatch article published a few days earlier—but it’s not a particularly convincing one because most of the money would go directly to shareholders and executives, rather than the government or workers. Cook’s argument is also at odds with history. “Usually the conventional wisdom is the opposite,” John Cochrane, a senior fellow at the Hoover Institute, told Business Insider. “Stock buybacks started in the 1990s as a way of helping people to avoid taxes.”
On February 5th, 1996, the cover of Businessweek magazine read “THE FALL OF AN AMERICAN ICON,” with the iconic Apple logo perched atop the foreboding phrase. Twenty-two years later, Apple just became the first corporation in history to eclipse a valuation of $1 trillion, following the decade-long success story that is the iPhone. As we pointed out yesterday, the valuation itself doesn’t mean much, but it goes to show just how drastic of a turnaround Apple was able to make just a couple of decades after being on the brink of going under.
The record-breaking performance apparently prompted a memo from Apple CEO Tim Cook, which Buzzfeed News was able to get its hands on just hours after he sent it out to his employees. Cook is celebratory in his reaction to the news, but reminds his team that a share price is “not the most important measure of our success.”
You can read the full memo here to see what Tim Cook had to say after markets closed on Thursday evening:
