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
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.
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.
Investment Specialist, Equity Value
I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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