The Daily Update - Happenings in the World of Trillion Dollar Companies

So far there have only really been three of them in the US: first Apple in August 2018, then Amazon in the following month, and last to join the trillion dollar club was Microsoft just in this past week. In the turbulent period since Apple’s landmark accomplishment valuations had pushed highs of $1.1tn and bottomed below $0.7tn (as with Amazon). But the ~30% rally so far this year finally pushed Microsoft over the line and brought the other two tech giants back within 5% (a mere 50 billion dollars) of that twelve-zeros stature – so only meet the mark on a good day with the benefit of a rounding error.

But today has been a very good day for Apple with forecast beats in earnings and – quintessentially – in iPhone sales. News of $31 billion in iPhone sales (which in recent periods have accounted for between 54% and 70% of the company’s revenue) boosted shares by 5.5% in pre-market trading. After a run of disappointing earnings and concerns over iPhone sales trajectory, as well as broader softness from other earlier earnings across peers, many were preparing for some downward retracement (evident from the shares falling nearly -2% yesterday) so this boost in valuation has come despite quarterly revenue again falling year-on-year: from $61.1bn to $58bn.

The latest sales have been boosted via discounts and trade-ins; they themselves are thus trading-in profit margins on hardware for larger capture in potential future digital services revenue (they may also be drawing from future sales to mitigate or smooth the slowing growth). It’s not clear whether the company could make a successful transition to services (as the dominant driver for their income) in a way that software companies like Microsoft and Adobe seem to be accomplishing? Even with strong growth in this aspect (16% yoy), services still only make-up a fifth of their total revenue; that is about as much as sales of iPads and Macs combined.

During the earnings call CEO Tim Cook notably said how they "certainly feel a lot better than we did 90 days ago" with regards to China. But this language falls far short of being optimistic and reflects a year-on-year fall in revenue from the Greater China region of -22% compared to the -27% decline seen last quarter. Still Apple has spent over $15bn in R&D in the past year and plans to continue this trend. But the “real growth” in the company can be seen in the 5% dividend growth alongside adding a further $75bn in buybacks to the $100bn they announced last year.

In recent years the company tapped the debt markets in numerous large rounds in parallel with accumulating cash offshore. But following the repatriation of over 250 billion dollars last year – under the favourable terms of the current US Administration – the cash pile had become excessive, even for an innovative company like Apple. So although this is certainly not what the US Administration hoped for when they introduce the foreign profits tax holiday, perhaps this is the best use of this cash for now rather than overpaying for acquisitions, uncertain ventures or just sitting on cash. Another sign of the times and how the latter-stage growth in the monetary base has been good for asset prices but has become somewhat ineffective in further stimulating economic growth.

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