Apple Inc.’s (NASDAQ: AAPL) market capitalization has been the highest among all American companies off and on, trading places with Microsoft Corp. (NASDAQ: MSFT). Now Apple has pushed into the top spot with a market cap of $1.66 trillion, a figure that was unimaginable a year ago. It hit the figure with an 89% increase in share price over the past year, compared to Microsoft’s 55% increase. The threat of COVID-19 to the economy has not phased the optimism of the market.
[in-text-ad]
How Can Apple’s Value Be So High?
On paper, there are reasons Apple should not have done so well. Its revenue for the quarter that ended March 28 was $58.3 billion, up only 1% year over year. Earnings were at $2.55 per share, up a modest 4%. Apple said it would be hard to forecast future sales.
The pandemic has made that difficult. However, the board was confident enough to issue a cash dividend of $0.82 a share when many other companies have reduced or eliminated theirs. Apple also said it would increase its share buyback account by $50 billion. It has the cash. At the end of the quarter, it had $93 billion in cash and marketable securities. Apple generated operating cash flow of $13.3 billion in the quarter.
What Apple Sells Is the Key to the Rise in Market Cap
The engine of Apple’s success for nearly a decade has been the iPhone, among the most successful smartphones in the world. Only sales of Samsung’s smartphones have challenged it.
However, the iPhone is no longer critical to Apple’s growth. Revenue from iPhone sales declined in the most recent quarter to $29 billion from $31 billion the year before. Mac revenue dipped a very small amount to $5.3 billion. iPad sales fell from $4.9 billion to $4.3 billion.
Apple’s one piece of good news is that revenue from its services division rose from $11.5 billion to $13.3 billion. That was the figure investors are in love with.
Services and 5G
Apple has hundreds of millions of devices in the global market place. Management believes it can sell people credit cards, movies, music and cloud storage. The Apple brand power may be enough to get people to stay inside Apple’s “ecosystem” and not buy these services from another company. If so, Apple’s services business could generate $80 billion a year, and it has margins much higher than Apple’s hardware.
The other driver of optimism about Apple’s future is the new 5G ultrafast broadband service, which has started to be installed around the world. It has begun to replace 4G service, and many people will need a new smartphone to access it. Apple can sell these people a new generation of smartphones as people worldwide upgrade to take advantage of this significantly faster speed.
Apple’s Future Market Value
Apple’s growth may have slowed temporarily. However, it has new products and services poised to push the growth rate, and its market cap, much higher.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
