Apple (AAPL): $1 Trillion Is Just the Beginning

Apple (AAPL, $201.50) became the first American company to become worth more than $1 trillion when it hit $207.05 per share in intraday trading on Thursday, Aug. 2.

The question now is whether it can build on such a lofty number.

The answer is almost certainly yes.

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Like the four-minute mile or breaking the sound barrier, the idea of a company with a market capitalization – the share price multiplied by the number of outstanding shares – of more than a trillion dollars was once almost unthinkable. PetroChina (PTR), the Chinese oil giant, topped the trillion-dollar mark on its first day of trading in 2007, but the stock collapsed soon thereafter.

Part of the argument against a company hitting a trillion dollars in market value – and staying there – is finance’s so-called law of large numbers. As a company gets bigger, its growth rate tends to slow down. After all, it’s easier to double revenue from $1 million to $2 million than from $100 billion to $200 billion. It’s the difference between adding $1 million in sales and $100 billion in sales.

But there’s no law against a company being worth more than $1 trillion.

Heck, Amazon.com (AMZN, $877 billion), Google parent Alphabet (GOOGL, $852 billion) and Microsoft (MSFT, $825 billion) aren’t all that far behind the vaunted trillion-dollar level. And as long as these companies continue to generate long-term earnings growth – as virtually every analyst expects – their share prices will continue to rise over the long haul.

In Apple’s case, the outlook certainly looks bright.

What Will Drive Apple Stock Going Forward?

Apple’s final push to the $1 trillion mark came on the back of Tuesday night’s fiscal-third-quarter earnings report – one that encouraged Wall Street’s pros and individual investors alike by most measures. Most notably, profits and revenues both came in above analysts’ consensus estimates.

Canaccord Genuity analyst T. Michael Walkley, who rates AAPL stock at “Buy,” writes that iPhone sales continue to defy his expectations. The company sold 41.3 million units, versus Canaccord’s estimates for $40.5 million.

It turns out that the high-priced iPhone X didn’t turn off customers (unit sales were essentially flat year-over-year) as much as it raised the company’s overall average selling prices. Meanwhile, the Services division – which includes the App Store, Apple Music, Apple Care, iCloud and Apple Pay – is becoming an increasingly important driver of revenue too.

When it comes to the nearly $1,000 iPhone X, Walkley notes that Apple is taking share from its primary premium-tier competitor Samsung. It’s a trend the analyst expects to continue to accelerate through next year and beyond.

“Apple’s growing share of the high-end smartphone market positions the company with a strong, loyal customer base that could enable Apple to maintain the high levels of annual iPhone sales despite the higher (selling prices) for the iPhone X,” Walkley says.

Higher average selling prices equal higher profit margins, by the way. So much for the theory that the iPhone X was too expensive.

And just for good measure, Apple repurchased $20 billion in stock during the quarter – $10 billion under its new $100 billion buyback program, and $10 billion under its prior authorization.

True, Apple’s earnings growth rate is slowing down. Analysts surveyed by Thomson Reuters expect earnings to increase at an average pace of 12.8% a year for the next five years, a decrease from an average annual clip of 14.3% over the past five years.

That’s a far cry from Apple becoming some kind of poky utility, however. And with shares priced at just 15.2 times expected earnings, the market has adjusted to the new reality.

Bull markets don’t last forever. Stocks in general will, of course, have to cooperate.

But given Apple’s fundamentals and its reasonable valuation, the trillion-dollar market cap looks a lot more like a milestone than it does a wall.