For the first time ever in the history of finance, investors and economists alike are expecting a public company to hit a market cap of $1 trillion – roughly Indonesia’s Gross Domestic Product. The expected winner could be found among the stocks Jim Cramer nicknamed FANGs. We’re talking about none other than the tech market leaders – Facebook, Amazon, Netflix and Google (known to most traders by its parent company’s name Alphabet Inc). Investors now call this group FAANGs, with the newest addition being none other than Apple.
Which of these tech giants is going to hit the magic number first and how soon? What could delay or hinder them from getting there? The answers to these questions could provide meaningful and constructive insight to investors, as they could help identify the weaknesses and strengths in each of these company’s public shares, which have significantly contributed to building successful portfolios over the last years.
FAANG and the S&P 500
According to a recent report released by S&P Global, information and technology stocks were a major contributor to S&P returns. To be exact in May, S&P 500 returns were 76.5% information and technology stocks. 21.3% of that performance can be traced back to Apple and 45% of the same 76.5% can be traced back to the FAANGs.
According to some analysts, the conclusion is pretty straight forward – Netflix probably won’t get there first and the reason is simple. As companies, they are much smaller and there’s so much more road to walk before they get the magical 1. Runner-up Netflix with a $150 billion market capitalization, probably won’t get there before Apple either. Facebook? Closer than the rest of them but with a market cap of only $540 billion, the FANGs are nowhere near Apple’s $935 billion.
So obviously our list has boiled down to one candidate and that’s Apple.
Current Market Capitalization: $935 billion (this information is correct as of June 1st, 2018)
Why Apple Will Get To The Trillions First: How many years have the markets been asking for this one thing from Apple: show us more than the iPhone Inc. Guess what.. now it’s happening.
Let’s take a look at Apple’s most recent stock upgrade, whose price target of $214 will propel the company to a trillion plus in the next year. What helped this surge? It was their services business. Apple’s services business saw insane growth last fiscal year – 23% to be precise and 31% in the second quarter of 2018’s fiscal year (which ended in March).
Quick And Important Stat:
Did you know that only roughly a quarter of Apple users pay for Apple services like iCloud, Music and Pay? Their wearable business (some items include their beats headphone and Apple Watch) is about the same size as a Fortune 300 company, having achieved $9 billion in sales in just the last 12 months.
This diversification, also seen in Amazon’s strategy, matters for two main reasons. First and foremost, profits and good earnings usually mean the stock price will rise. In addition, investors tend to show preference to services companies as opposed to hardware because services companies have repeat customers, which means they’ll keep coming back for the service, whereas when you buy a desktop, chances are you won’t go back for quite some time, to put it simply. “At this point, it starts and ends with the services business,” says Angelo Zino, analyst at CFRA. “As long as the iPhone business can even be maintained at current levels, the free cash flow it generates can be invested in other businesses.”
The push it’s going to take to get Apple above the $1 trillion market cap isn’t particularly frightening. Shares are trading sixteen times of what was expected for this year.
Apple hitting the $1 trillion mark would essentially be very good for the stock. “Driven by the new tax law’s treatment of offshore earnings, the bill lets Apple buy its shares with retained earnings, wherever they are earned for accounting purposes, rather than borrow money to expand U.S. buybacks. It depends on how quickly they do the buyback,” concluded Zino. “At the end of the day, though, we don’t think the buyback will keep them from getting to $1 trillion.”
This article is for educational and informative purposes only and should not be considered as investment or trading advice.