At its Sept. 2 post-split price of $137/share, Apple (NASDAQ:AAPL) is now worth $2.3 trillion. Put another way, AAPL stock is priced nearly 10 times last year’s revenue of $259 billion.
Some will find that valuation ridiculous. I do … and I’m an Apple shareholder.
Apple’s 2019 revenue was only 13% ahead of its 2015 haul. Its net income was less than 10% more. Until this year’s explosive run-up, price gains had been based on stock buybacks, the number of shares outstanding shrinking 20%.
Yet Apple’s value is up 82% in 2020, driven by the pandemic and the Fed’s pumping of money into the stock market. Is there any legitimate reason for Apple to justify this investor love?
Turns out there is. It’s inside the device. Apple is now designing its own semiconductor chips.
Joining the Fab-less
Apple Silicon makes all sorts of sense. Hardware has become software over the last decade. Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) don’t own chip fabrication plants. They create designs that Taiwan Semiconductor (NYSE:TSM), known as TSMC, manufactures. Apple is now just as fab-less as they are.
The company still gets its chips made by TSMC. Apple’s business is one reason TSMC is negotiating to build a fab near Phoenix. The two companies have been close for years. Apple’s business helped fuel the Taiwanese company’s expansion.
The close relationship puts Apple in front for all TSMC breakthroughs, like the 5 nm fabrication planned for 2021. Apple also has the money to create designs Nvidia and AMD can’t match, in both processing and graphics.
By designing its own chips, Apple increases its margins and controls its designs. Instead of just competing with Microsoft (NASDAQ:MSFT) based PCs, it can challenge Alphabet (NASDAQ:GOOGL) Chromebooks.
Who Gets Hurt?
Apple is also worth 7.5 times more than Nvidia. It could easily swoop in to take Softbank’s (OTCMKTS:SFTBY) ARM Holdings, whose designs Apple microprocessors are based on, if Nvidia makes a bid. As for AMD? Despite its rapid growth, it’s a minnow next to the Apple whale, with its market value of “just” $108 billion.
Then there’s Qualcomm (NASDAQ:QCOM), with which Apple has had a long-running legal feud. Qualcomm reportedly developed its latest Snapdragon processor, which includes a modem, specifically around Apple’s specifications. But Apple doesn’t forget. It plans to start making its own modems by 2022, maybe 2023. These would be integrated into processing chips, as with Snapdragon.
Any company in the Apple supply chain is also under increasing pressure to deliver or be replaced. That may include Skyworks Solutions (NASDAQ:SWKS), the RF chip supplier. Apple represents nearly half its business. When Tim Cook sneezes, Skyworks catches cold. When Apple beats expectations, Skyworks basks in the glory.
Then there’s Samsung Electronics (OTCMKTS:SSNLF), which does chip design, fabrication, and has products that compete directly with those of Apple. But in value? Apple is now worth six Samsungs.
The Bottom Line on AAPL Stock
Apple’s move into silicon is the biggest semiconductor story of the year, and the biggest story charging AAPL stock. It has taken over from the rise of its services business, which grew 15% year-over-year in its most recent quarter.
What Apple Silicon promises down the road is lower prices and higher margins. That’s what the stock’s current price demands. Even if the fourth quarter numbers, due to be reported Nov. 4, seem to disappoint, the silicon story will just be starting.
The next time Apple dips, and it could happen at any time, buy it.
Dana Blankenhorn has been a financial and technology journalist since 1978. 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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AAPL, INTC, NVDA, QCOM and TSM.