Apple Hits $1 Trillion
Apple hitting a $1 trillion market cap could boost consumer sentiment on the stock market. AAPL is larger than 3 entire sectors. The utilities have a market cap of $700 billion. The materials and telecom sectors have market caps of $653 billion and $492 billion respectively.
The chart below shows the sizes of the 4 biggest firms by market cap in 1955, 1987, 1999, and 2018. The fact that all the firms in the top 4 are internet names shows the power of this mega trend.
Bearish Arguments On Apple
The most bearish argument on Apple is the company hasn’t grown much in the past few years as its EPS growth has been boosted by buybacks. I think buybacks are a great use of capital.
It’s better for Apple to reward shareholders than to make a terrible acquisition of an overvalued company that it can’t integrate properly. IBM has shown making hundreds of acquisitions can’t bring profit growth.
Even though I’m not buying the argument that the stock isn’t a buy because buybacks are manipulating the numbers, I’ll still show some bearish arguments because it’s important to hear both sides of the story.
iPhone unit sales were only up 1% year over year. iPhone, iPad, and Mac unit growth combined was only 1.7% year over year. Profit growth is being driven by higher iPhone prices and services. Services were 17.9% of revenues which is up from 16% in Q3 2017.
As you can see from the chart above, trailing pre-tax income growth is still below 2015. iPhone sales in Q3 peaked in 2015 as shown in the chart below.
Apple is being helped by the lower tax rate and buybacks. As a shareholder, I don’t care if my profits come from buybacks or pre-tax earnings growth.
Apple Making Big Bets
The chart below isn’t bearish or bullish. It shows Apple’s R&D as a percentage of revenue has increased to 6.9% which is the highest level since June 2003.
In 2003 Apple was investing in its core products of today which are the iPhone and the iPad. However, just because Apple is investing again now, doesn’t mean it will have another run of great product innovation.
The company is still behind Google in voice activated AI; there’s no guarantee Siri and HomePod will catch up to the competition.
We don’t know much about Apple’s investments in self driving cars which means Apple may or may not become the leader in that category. As you can see, the difference in the size of the investments in 2003 and today are massive in nominal terms.
The investments were about $120 million in 2003 and they are $3.7 billion today. However, throwing more money at a problem doesn’t solve it.
Apple and the Great Day For Stocks
The S&P 500 was up 0.49% on Thursday as it closes in on its January record. The market is up 5.75% year to date. The Fear and Greed index is at 69 out of 100 which signals the market is overbought. The Nasdaq was up 1.24% as it was led by Apple and Tesla.
I mentioned last week that great reports from Apple and Tesla could shift sentiment to the positive side. This occurred as Apple’s market cap hit $1 trillion and Tesla stock was up 16.2% after its earnings report. The tech sector led the market up as it increased 1.37%. The biggest loser was materials again as it fell 0.72%.
After Apple, Tesla Soars After Its Earnings Report
As I mentioned, Tesla stock was up 16.2% after its earnings report. This is the most interesting and talked about stock in the market because it has a high short interest while maintaining a lofty valuation.
The company is trying to revolutionize the auto industry by building autonomous electric cars, but it still loses money. This is all while its CEO, Elon Musk, has ranted on Twitter and on the conference calls.
Tesla had a loss per share of $3.06 which was worse than the expectations for a loss of $2.92. Revenues were $4 billion which beat estimates for $3.92 billion.
As you can see in the 3 charts below, the estimates for EBITDA, adjusted earnings, and EPS all fell throughout the quarter. One of the best parts of this report was that Tesla had $2.2 billion of cash on hand at the end of the quarter which signals it won’t need to raise cash soon.
The company is trying to be profitable by the end of the year, so it never needs to raise cash.
Tesla versus Apple Strategies
Guidance for capex in 2018 was $2.5 billion which was way below the expectations for $3.4 billion. The question is whether Tesla is trying to lower its capex to meet its goal for profitability at the expense of future growth or if it has made enough investments to reach its goals to be an energy company and a car company.
Tesla produced 53,339 vehicles in Q2. There were 40,768 deliveries as Model X and S made up 22,319 of those and Model 3 made up 18,449 of them. The firm hit its goal of achieving production of 5,000 Model 3 vehicles per week in July repeatedly. The goal by the end of August is for it to produce 6,000 vehicles per week.
The goal for the end of the year is 10,000 vehicles per week. It’s questionable if there is enough demand for all those vehicles since the $35,000 base model isn’t available; the cheapest car for sale costs $49,000 now.
Apple and Tesla Stock Market Reactions
The reaction in the stock wasn’t about the numbers because it was only up about 3% after the report was posted.
The stock went up because Elon Musk showed restraint on the conference call. He apologized to an analyst on the conference call for getting mad about his question on the last call, calling it bone headed.
This may have been the most valuable apology of all-time because of the increase the stock had. Investors are ready to invest in the money losing firm for the chance it mass produces the Model 3.
They just needed Elon Musk to be more professional on the calls. He surpassed this low bar. The bar for execution is much higher as the cars need to avoid quality issues.