Apple wins the race for $1 trillion valuation

Apple beats rivals Microsoft, Amazon and Google to landmark valuation

The iPhone maker had been leading the race for the $1 trillion race for some time and as Apple celebrated its new milestone its competitors were still some way behind. At the close of 2 August, Amazon was valued at $894.7 billion, followed by Alphabet at $863.4 billion and Microsoft at $825.8 billion.

Apple maintains momentum through higher priced iPhone X 

Despite concerns over its hefty price tag, as well as controversial decisions such as the one to remove the headphone jack, Apple has continued to demonstrate that its latest model, the iPhone X, is hitting the spot. While the business has evolved from computers to music players and then onto smartphones over the decades, Cook’s time at the company has not been focused on discovering Apple’s next ground-breaking product but on building out its ecosystem and increasing value.

For a company that was willing to kill its own business before someone else did, essentially eradicating its core iPod product when it introduced the iPhone to revolutionise mobile phones, some have questioned the lack of new major products that have been developed under Cook, who has paid more attention to supporting products like the Apple Watch, AirPod earphones and its apps and content like Apple Music.

Apple results beat expectations to propel shares higher

‘Our third quarter results were driven by continued strong sales of iPhone, Services and Wearables, and we are very excited about the products and services in our pipeline,’ – Tim Cook.

But the company has confidently shrugged off any doubt about the longevity of the iPhone or the potential of its latest model. It’s most recent results showed overall iPhone sales (driven by the X) were up by only 1% year-on-year (YoY) in the three months to the end of June, hitting 41.3 million units, but revenue rose by 20% to $29.91 billion. This is a testimony to Apple’s more expensive model, which has been pushing revenue higher since being launched, despite volume growth being fairly subdued as Cook and his team squeeze more value out of its phones.

While iPhones remain the main driver of revenue (accounting for about 56% of total revenue), Apple’s other revenue streams have built up over the years. Tablets, computers and other hardware like AirPods, Apple TV, Apple Watch and its HomePod smart speaker generated $13.8 billion in revenue in the most recent quarter, accounting for about 26% of all turnover. It is a similar story with the digital side of the business, with digital content and services generating $9.55 billion of quarterly sales to make up the remaining 18% of revenue – an all-time high for the segment.

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Overall, revenue in Q3 was up 17% from the year before at $53.27 billion, the fourth consecutive quarter of double digit revenue growth, helping deliver an equal 17% rise in pre-tax profit to $13.28 billion.

Samsung and Apple come under pressure from cheaper Chinese rivals

The resilience in iPhone sales is even more significant considering that its biggest rival Samsung, which has become the world’s biggest smartphone maker (using Google’s open Android operating system that rivals Apple’s iOS), posted the first decline in profits in almost two years as sales of its flagship Galaxy S9 wane amid rising competition from Chinese rivals like Huawei and Xiaomi.

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But recent reports have also suggested that Apple is succumbing to the rapid growth of Chinese rivals, which are aiming to release more high-tech products at a cheaper price to woo customers away from the big two. Samsung has long held the top spot in the global smartphone market with Apple firmly in second, but a report by the Guardian earlier this week claimed Huawei has become the first to break-up the two dominant players after stealing second place from Apple.

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The analysis, using aggregated data, said it was the first time in seven years that another firm had taken a place in the top two – claiming Samsung unit sales dropped 10% year-on-year in Q2 of 2018 compared to Apple volumes rising 1% and Huawei unit sales soaring 41%. The Guardian claims Samsung now has about a 20% market share with Huawei on 15%, overtaking Apple’s share of 12%.

Apple raises dividend and launches largest share buyback ever

One thing that has skewed Apple’s journey to becoming a $1 trillion company is its substantial share buybacks. Releasing its Q2 results at the start of May this year, Apple announced it would be returning $100 billion of its net cash to shareholders going forward and raised its quarterly dividend by 16%. Apple bought back $20 billion worth of shares in the three months to the end of June alone, ending the previous buyback programme.

Apple has already returned just shy of $300 billion to investors since the start of the 2012 financial year, the first year that Cook was in charge on a permanent basis, after spraying shareholders with nearly $220 billion of share buybacks and almost another $71 billion through dividend pay-outs. This has helped keep major investors such as Warren Buffet onside.

Q2 tends to be the worst of the year for Apple, followed by a better Q3 that usually sees the firm announce its dividend and share repurchase plans. The main reason that the buyback announced this year is far bigger than those conducted previously is because of the US tax reform introduced by US President Donald Trump, cutting corporation tax and encouraging the likes of Apple to repatriate its overseas profits and return them to shareholders.

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Where next for Apple and its $1 trillion valuation?

Apple seems unstoppable as people continue to join the company’s ecosystem and it finds new ways to squeeze out even more value from its customers. The valuation vindicates the company’s strategy under Cook’s leadership but as the CEO himself would say, the business is not based on just its share price.

Apple seems as untouchable now as the former giants of the mobile phone world were. The introduction of the iPhone obliterated leaders like Nokia and Blackberry but as Apple did to them, another rival could do to Apple – particularly with the rise of Chinese rivals.

While building out its supporting products and developing its high-margin digital content is yielding results for the business, it ultimately relies on thinking up developments of the iPhone that was first introduced back in 2007 and some are worried that Apple has little in the pipeline that could properly replace iPhones, should demand for its smartphone start to wane. Apple is reportedly working on secretive projects involving everything from autonomous cars and augmented reality glasses to a new video streaming service that will keep the likes of Netflix and Amazon up at night, but the future of Apple beyond the iPhone (if there is one) is unknown.

Amazon, Google and Microsoft: who will hit $1 trillion next?

While Apple has won the race to cement itself as the world’s most valuable listed company in the world, some analysts believe it has room to go much higher considering shares are still trading at about 18 times earnings compared to the likes of Amazon which trade at about 166 times.

Amazon remains in line to become the second public company to reach the $1 trillion valuation, having recently demonstrated the momentum of the business following its recent record-breaking Prime Day sale event.

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However, Microsoft is a contender. The company has reached an all-time high following the release of its most recent quarterly results, which beat expectations, while Alphabet’s Google has also found higher ground of late after reporting stellar results and following rumours it could re-enter China (after exiting the country in 2010).

Apple has become the first $1 trillion company, but it will not be the last...