Apple’s Trillion Dollar Achievement and Also Some Forthcoming Challenges

Apple Inc. is the largest company in the world today. In Aug 2018, the company became the first in the world to reach a trillion dollar valuation! This meant Apple was ahead of its competition by at least $150 billion. Other companies such as Alphabet have a market capitalization close to $850 billion.

The reactions to Apple’s achievements have been varied. Tim Cook, the CEO of Apple himself said that the $1 trillion milestone is significant but is not the most important factor to measure the success or the performance of the firm.

There have been many other firms that have achieved similar milestones in the past. For instance, US Steel was the first company to achieve the billion-dollar benchmark. General Electric was the first company to achieve the $100 billion benchmark. Microsoft was the first company to achieve the $500 billion benchmark.

The record of history is clear. None of these firms have been able to hold on to their lead for very long. This is the reason why Apple cannot afford to rest on its trillion-dollar laurel. Instead, it needs to keep moving forward.

In this article, we will list down some of the challenges which lie in front of this mega-firm.

Declining Sales: The sales of Apple’s start products like iPhone have been falling for some time now. This is now a fact and no longer up for debate. Recently Apple has boosted its sales by earning more from its services like iTunes subscriptions.

However, it is unlikely that the company will be able to continue doing this in the long run. The problem with Apple is that its products are now reaching maturity. This is the reason why they are being commoditized. Apple should expect a decline in sales from hereon.

This would obviously be a threat to their business model. Apple needs to create a new business model, convince their investors about the viability of their business model and also successfully follow their business model in order to maintain the trillion dollar valuation.

Stock Market Bubble: Market valuation means the price of the shares is multiplied by the number of shares outstanding. Hence, if the share market price increases, so does the valuation of the firm. This is exactly what has happened in the case of Apple.

The company has seen a massive increase in its stock price. This has happened even though the fundamentals underlying the company remain unchanged. Many experts, therefore, believe that Apple’s trillion dollar valuation is actually proof that there is a stock market bubble going on.

Populism against Apple: The United States of America is facing a populist wave. Poor and working-class people want the rich to be taxed more aggressively. Apple is one of the biggest recipients of this kind of hatred and prejudice. For instance, Apple has recently negotiated with the Cupertino local government to shelve a "head tax."

A head tax is a tax that big companies have to pay on their headcount, i.e., on the number of people that they employ. Cupertino wanted Apple to pay $940 million in head taxes.

This amount is insignificant for the company since its annual revenues exceed $269 billion. However, the anger that people have against companies like Apple is significant. Apple was able to negotiate its way out of this tax since it employs more than three-quarters of the workforce in the Cupertino region.

However, sooner or later Apple may have to bow down to the demands of these populist leaders. This will obviously affect Apple’s ability to maintain its trillion dollar valuation

Low Valuation: Even though Apple has a trillion dollar valuation, some consider the valuation to be low. This is because the company has earned $56 billion in post-tax profit in 2017.

If the price to earnings ratio of this company was the same as Facebook or Google, the company would be valued at close to $2 trillion dollars. Wall Street intrinsically knows that Apple has reached close to its full potential.

This is why they are not valuing the company using the same yardstick as companies like Amazon. Amazon has twice the growth rate of Apple and it is likely that the company will continue on its growth path for some more time.

On the other hand, Apple’s growth potential seems to be muted as far as the future is concerned. This is because Apple sells hardware products. These products cost a lot of money to manufacture and are difficult to sell.

On the other hand, firms like Google and Facebook sell internet services. Adding an additional user costs them virtually nothing. Hence, an additional user has a positive impact on the bottom line.

Also, Apple is valued at close to 4.5 % of the United States economy. Only two firms in the past have been valued at more than this. The two firms are Microsoft and General Electric.

Over time, the market value of both these firms rationalized. Hence, many investors are of the opinion that it is only a matter of time that Apple’s valuation would get rationalized as well.

To sum it up, Apple’s $1 trillion dollar valuation is less of an achievement and more of a challenge. However, Apple has already depicted that it is more than capable of standing up to challenges.