During the dot-com-crazed 1990s, Cisco Systems Inc. became the world’s most valuable company. Widely expected to become the first company to hit a trillion-dollar capitalization, it made it barely halfway there. When the technology sector peaked in March 2000, Cisco had a market capitalization near $550 billion.
From that peak, the entire technology sector imploded. Cisco fared even worse than the Nasdaq, losing 87 percent from its zenith to its nadir. Today, some 18 years later, Cisco is worth about $221 billion; its average annual compounded returns from those lofty heights is a negative -2.17 percent per year, including reinvested dividends.
The world, it seems, would have to wait a while for its first true trillion-dollar market capitalization company.
I was discussing this with a friend earlier this week. Apple is inching toward that trillion-dollar mark (its valuation hovers around $900 billion). Prior to the recent 12 percent market swoon, Apple had been trading at an all-time high of $180.10 per share. As of this week, it eclipsed that, recovering all of that February drawdown.
The trend suggests that sometime this year, Apple will become America’s first trillion-dollar company. What will drive the move to a trillion dollars? Consider these four factors as key to Apple’s continued upward momentum:
Share repurchases: Since 2012, when management first announced its intentions to do big share buybacks, Apple has shrunk its outstanding publicly traded shares considerably. As of 2013, there were 6.6 billion shares available to the public. Today, that count stands at a little over 5.07 billion shares – a 23.2 percent reduction.
Apple’s board of directors had most recently authorized a $210 billion share-repurchase program that is expected to be completed by March 2019, according to Apple investor relations. That was before the very corporate friendly 2017 tax reform bill was passed. I would expect that bill will encourage even more share repurchases. We should not be surprised to see a 10 or even 20 percent share count reduction over the next five years.
What is the effect of reducing share count? It makes the earnings of each share higher proportionately. At the same price, higher earnings equal a lower price-to-earnings ratio, and the company appears cheaper. This could have the impact of attracting value buyers, including…
Warren Buffett: The famous value investor has been notoriously tech averse throughout his career. His recent announcement that he is out of IBM and into Apple in a big way surprised some people. Buffett said Apple is now Berkshire Hathaway’s second biggest holding (after troubled serial fraudster Wells Fargo); AAPL was the stock BRK bought the most of in 2017. Although he claims he still has confidence in Wells Fargo, he cut his stake last year; don’t be surprised to see Berkshire’s Wells holdings get further reduced.
Buffett’s faithful followers often follow his lead, and are likely to add Apple to their portfolio of value stocks.