Investors are piling into Apple (NASDAQ:AAPL), and all of its cloud peers, because in the present market only tech seems to work.
Another record quarter, with net income of $22.2 billion, $4.99 per share, on revenue of $91.8 billion, sent Apple shares up 2% on Jan. 29.
The market capitalization closed at $1.4 trillion. Shares were trading at nearly 26 times trailing earnings, at 5.3 times last year’s revenue.
In the land of the cloud companies, this isn’t unusual. Microsoft (NASDAQ:MSFT) sells for nearly 10 times revenue. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is worth 6.4 times revenue. Even Amazon (NASDAQ:AMZN) is worth 3.5 times last year’s revenue. That includes my cat litter subscription.
Why So High?
Tech is working because tech is beating deflation. The new iPhone 11 Pro Max lists at about $1,100 but its parts cost just $490.
Everywhere else, deflation is winning. Oil is down and Exxon Mobil (NYSE:XOM) is dropping with it. It’s now worth 20% of Apple, although Exxon’s revenue is higher than Apple’s. General Motors (NYSE:GM) is worth $48 billion on sales of $147 billion.
Farmers are going broke. Retailers are going under. Bankers are hitting the bricks. There’s a trucking bloodbath.
But tech still works. Money is piling into tech assets like there’s no tomorrow. Visa (NYSE:V) is once again worth more than JPMorgan Chase (NYSE:JPM). Shopify (NYSE:SHOP) is worth $54 billion on trailing year sales of $1.5 billion.
The Weakness of Assets
The problem is that all these numbers — Apple’s value, Visa’s value and Shopify’s value — they’re all asset values. Only a fraction of these values represents money in motion. It is mostly money locked in vaults.
If 10% of Apple shares went on the market today, the holders wouldn’t get $142 billion. An asset’s value is its price at the last trade, multiplied by the number of assets. It’s not as liquid as a stock listing makes it seem.
The New York Mets are selling for $2.6 billion because bad baseball teams are a rare asset. If all 30 Major League Baseball owners tried to sell tomorrow, they wouldn’t get $75 billion for those assets. The same is true for real estate and any other asset.
There is real economic danger in this because money is only money when it’s being exchanged. Money locked in assets is potential buying power. It’s not economic activity. If Aladdin tried to dump all his gold and jewels on the market at once, the price of gold and jewels would plummet. Money is a verb.
Assets are only worth their claimed value if there are willing buyers for them, at that value. Microsoft’s revenue last year was only 40% higher than that of International Business Machines (NYSE:IBM). Yet the asset value of Microsoft is more than 10 times that of IBM. Why? Because Microsoft shares closed Jan. 29 at $168.04 and there are 7.7 billion of them. If all those 7.7 billion shares came to the market today, you might not even get IBM’s market cap of $124 billion.
As MythBusters’ Adam Savage might say, “There’s your problem.”
The Bottom Line on Apple Stock
Tech stocks work because tech companies can hold prices despite deflation, at a time when nothing else can.
Moore’s Law has been accelerating deflation for 50 years, ever since the first microchip, and that’s good. But when that value is locked in assets, when it’s not accelerating real commerce, the economy is vulnerable to a panic.
Asset values can disappear in a flash if those who hold the assets suddenly decide to sell.
Current economic policy doesn’t account for this. The Federal Reserve and President Donald Trump’s administration think we’re all rich, especially if we own Apple stock.
Are we?
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, JPM, AMZN and MSFT.
