Apple Part I: A $1 trillion company at 18x P/E

Last week I attended an Apple summit hosted by a prominent Apple analyst. One of the main lamentations shared by both the host and a majority of the audience (for this was not a gathering of investment analysts) was why Apple, the most valuable company and arguably the most recognisable brand in the world, was persistently priced by the market like it was going out of business – all the way up to $1 trillion. This led to some insightful analysis and discussion of Apple as a business, and has prompted me to think about some of the key perspectives or “lenses” through which to analyse Apple both as a company and an investment.

Part I of this two-part series will look at why Apple seems to attract more than its fair share of criticism and doubt, and whether it is warranted. Part II will consider what it might take for Apple to reach the $2 trillion milestone.

Apple the ugly duckling

To start, no analysis of Apple can avoid comparisons with the other four titans of tech – Facebook, Amazon, Microsoft and Google. The biggest gripe of the summit attendees was that Apple is always compared unfavourably against these other tech companies by both the financial and technology media. There were calls for Apple’s downfall after the death of Steve Jobs, again after the company failed to follow up the success of the iPhone 6, and then again after global smartphone shipments plateaued and replacement cycles elongated. Certainly if one were to look at P/E multiples, Apple’s measly 18x appears to be the odd one out, especially relative to its gargantuan market capitalisation.

Some of the more obvious reasons for this seemingly “low valuation” include Apple being in hardware instead of software or internet, Apple being in the competitive smartphone market, and Apple being on a flatter and shakier growth trajectory than the other tech companies due to its reliance on a single product in a mature market. In other words, Apple is seen as somehow more vulnerable or fragile than the others and hence trades on achieved numbers, just as it has every year for the last 10 years from $75 billion to $1 trillion, rather than on growth (Facebook, Google) or story (Amazon).

Superficially, this appears to be true. There is no real alternative to Google for search or search advertising. There are few alternatives to Facebook when it comes to social media advertising. And Microsoft is still the undisputed leader of enterprise-scale productivity software. Apple, on the other hand, competes with Samsung, Huawei, Xiaomi, OPPO and a whole host of other smaller smartphone manufacturers, as well as smartphone and wearables manufacturers.

But this list of predominantly cheap Chinese competition is telling in itself – at the premium end where Apple sits, the company has virtually no competition. Samsung, the only real competitor with its flagship Galaxy and Note series, proved to the world this year that its customers were significantly more price elastic than Apple’s when it tried to piggyback iPhone X pricing and suffered a 10% drop in shipments. In fact, Apple captures nearly 90% of industry-wide smartphone profits with only a market share in the teens. This effectively makes Apple more of a monopoly than any of the other tech companies in their core domains.

Furthermore, consider how many customers each company has. Microsoft has maybe 500 customers that matter (the Fortune 500) and everyone else who follows. Facebook and Google might have several thousands of advertising customers that really matter, although there is no real alternative to their duopoly. Apple likely has somewhere between 600 million and 800 million loyal customers who have plenty of alternatives available, yet Apple’s installed base continues to grow at a double-digit rate. In terms of fragility, it is hard to make a compelling argument that Apple is somehow more fragile, either financially or operationally, than the other big tech companies.

Stay tuned for Part II where we explore some important lenses through which to analyse Apple and its future prospects.

The Montaka funds own shares in Apple (Nasdaq: AAPL), Facebook (Nasdaq: FB) and Alphabet (Nasdaq: GOOGL)

DH5_2155Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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