A theory on the gravity of Apple’s situation

Apple is an extraordinary, record-breaking, gravity-defying business but there must come a time when the huge numbers that have been keeping it at the pinnacle of the global market start working against it

29/09/2020
AdobeStock_118108592

Authors

Andrew Williams
Investment Director

Popular legend may tell us it was an apple falling to the ground that prompted Sir Isaac Newton to formulate his theory of gravity but the business that took the fruit’s name appears largely immune to this particular law of physics. Having become the first company to reach $1 trillion (£779bn) in value – on 2 August 2018, 42 years after it was founded – Apple took just two years to be the first to the $2 trillion mark, on 31 July 2020.

We say ‘largely immune’ because, since then, Apple’s share price has dropped like Newton was sitting beneath it – at one point finding itself 16% down on its high. Along the way, Apple made another, less welcome, piece of corporate history – its $179bn (8%) drop in value on 3 September represented the biggest-ever fall in market capitalisation for a US business.

To put things in context, that is larger than the individual market capitalisations of 470 of the companies in the main US index, the S&P500. And that is how we get to talk about Apple these days – in terms of multiples of other businesses. Even after that 16% sell-off, Apple is still worth as much as the entire FTSE 100 index of leading UK businesses.

Respective valuations

That was a stat that really caught our attention, here on The Value Perspective – after all, back in January, Apple was ‘only’ worth half the main UK benchmark. So what does this doubling in value mean for their respective valuations? Certainly Apple looks more expensive – it is trading on a price/earnings (P/E) ratio of 29x compared to the Footsie’s 14x. At 0.8%, meanwhile, its dividend yield is a fifth of the Footsie’s 4.2%.

 

That said, Apple’s growth numbers are significantly higher. Earnings per share growth for the period from 2017 to 2021 is now expected to be 13% for Apple, compared with -2% for the FTSE 100 as a whole. At the same time – and admittedly from that much lower base – consensus forecasts have Apple’s dividend per share growth at 9%, compared with 1% for the Footsie.

What that means is, if Apple continues to grow at that pace and earnings across the FTSE 100 as a whole reverted to 0% growth, then it would take six years for them to have the same PE ratio. Alternatively, if we assume FTSE 100 earnings growth can mean-revert to closer to the long-term average of roughly 6%, while Apple’s holds firm at 13%, then they will be on the same valuation in about 12 years.

Passing for ‘normal’

It is a measure of what has passed for ‘normal’ in markets in recent years that there will be plenty of people who, after reading that paragraph, will merely shrug and think, ‘Sounds about right’. And yet, even in that second scenario, while the FTSE 100’s earnings would have to double over that 12-year period (again from a lower base), Apple’s would have to quadruple ...

Presumably there must come a time when the enormous, most-whole-business-sized numbers now involved in any Apple calculation start working against the company and its prospects for future growth. Certainly long-term financial history would strongly argue for that outcome – as, more specifically, does market strategist, author and our podcast guest earlier this year Michael Mauboussin in The Base Rate Book.

And, yes, we appreciate we could have argued something similar at various points over the last 10 years – and indeed we have, in pieces such as The issue at the core of Apple’s share price falls. Nevertheless, as investors experienced to some degree at the start of September and Sir Isaac Newton put a lot more cleverly, what goes up, at some point, really must come down.

Subscribe to our Insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.

Authors

Andrew Williams
Investment Director

Topics

Behavioural finance
Value
The Value Perspective
Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.