Apple Inc. (NASDAQ:AAPL) is big and getting bigger, bit it also is getting more diverse which may keep it growing. There is a reason why the biggest animals appear only when an ecosystem is under the least stress, and disappear when it comes under crisis.
Really big animals, your T. Rex or blue whale, your mastodon and saber tooth cat, can’t deal with sudden, catastrophic change that smaller animals find ways to adapt to. Whether that change is a giant meteor, a new climate or just the introduction of guys with flint spears to the ecosystem, the biggest animals are the most vulnerable.
This is true in the markets as well, where Apple is the blue whale. If the stock price rose to $200 per share it would be worth $1 trillion. Its recent top of $164 per share gave it a market cap of nearly $850 billion. Its current price of about $156 per share means it’s worth over $800 billion.
Much Must Go Right for Apple
Previous market leaders morphed from growth stocks to income stocks well before they hit $800 billion in market cap. Apple is up nearly 35% just in 2017. Its 63 cents per share dividend, once considered generous, now yields just 1.6% to new buyers.
Apple revenues peaked in 2015 at $233 billion, but the “whisper number” of $50 billion in revenue means it will still fall short this year at $228 billion, Apple justifies its value on margins. It brings over one-quarter of revenue to the operating income line, and nearly 20% of last quarter’s $45 billion in revenue to the net income line. This makes the valuation reasonable.
But much most go right for a consumer products company to deliver those results. Suppliers must be squeezed continually. Reviews of new products must be solid. New products must not have glitches. To stay ahead, Apple must enter new businesses, like designing its own chips.
The Bear Posse
The perils of size, and the need for fat margins to maintain size, are behind the recent bearishness among some analysts.
Bad reviews on the iPhone 8 or a shortage of supplies for the iPhone X could cause investors to stampede before earnings. Its fight for margin could be hurting the quality of some components, like modem chips. The fight for margins is pushing some suppliers to the wall and keeping them alive will cost money. The behavior of companies throughout its ecosystem, like Foxconn, come under closer scrutiny as their size increases as well.
With all this potential bad news, I should be down on Apple as well. I’m not.