The value of Apple hit $2trillion this week after a significant rise in its share price over the last three months.
- Apple’s price to earnings ratio has moved from 20x at the start of the Covid-19 crisis to 35x today
- Over the ten years to 30 June 2020, the Russell 1000 growth index has returned 390% compared with 169% for the Russell 1000 value index.
- Valuations for growth stocks over value have become extreme
Apple’s value hit $2trillion this week, a mere two years after it had made history as the first $1 trillion company. Its stock market success has come in spite of some major challenges, from Covid-19 to its Chinese supply chains to public accusations of anti-competitive behaviour. It is, above all, the most obvious manifestation of the triumph of growth over value over the past decade.
The pandemic has only served to accelerate Apple’s dominance. Its price to earnings ratio has moved from 20x at the start of the Covid-19 crisis to 35x today. Its share price has risen over 50% from the start of the crisis. This comes in spite of relatively lacklustre earnings – its most recent earnings shown revenues at $59.7bn, up from $53.8bn at the same point last year. It has become a port in a storm.
There are sound reasons for the dominance of growth and these technology giants in particular. As interest rates have dropped, the value of future earnings has increased, which in turn has benefitted those companies with high earnings, However, the performance of companies such as Apple suggest that the elastic may have stretched too far.
Quilter points out that valuations between value and growth are now extreme. It says that over the ten years to 30 June 2020, the Russell 1000 growth index has returned 390% compared with 169% for the Russell 1000 value index.
Value managers are getting nervous. Quilter research shows that of the top ten largest US large cap value funds, seven hold at least one of Microsoft, Alphabet, Facebook or Apple. In fact, six of the ten hold at least two of those companies. These stocks have dominated the US market to the extent that it has become too painful for many value managers to retain a zero weighting.
These valuations have an ‘end of the bull market’ feel to them. They have undoubtedly been supported by the inflows into the US market, which has been dominant for over a decade. But the dominance of the US is also fading. It is difficult not to see Apple’s valuations as a last hurrah for growth.