Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Apple Became a Five Trillion Dollar Company
Transcript
- Lucas: Apple hit five trillion dollars in market cap this week. First public company ever to do it. Luna: Five trillion. That is just an absurd number. I mean, five trillion seconds ago there weren't even humans on Earth. Lucas: Right. And the stock is up about 5.7 percent in the last five days alone, which is what pushed it through that level. The S&P 500 is basically flat over that period, so this was entirely an Apple-specific move. Luna: What was the catalyst? Was it just the sheer momentum of the services narrative, or was there a specific data point? Lucas: I think there were two things. First, there was a note from Morgan Stanley over the weekend that raised their price target to four hundred and fifty dollars, citing App Store revenue accelerating. And second, there is growing chatter about the iPhone 18 cycle. Supply chain checks out of Asia suggest initial orders are up year-over-year. Luna: So the old iPhone upgrade cycle still moves the needle. Even though services are now the narrative driver. Lucas: Exactly. Services are the story for the multiple — Apple trades at about thirty-three times earnings, which is rich for a company growing revenue in the mid-single digits. But the iPhone is still the engine. And what is interesting is how the two reinforce each other. Every new iPhone adds to the installed base, and the installed base is what drives App Store and Apple Music and iCloud subscriptions. Luna: So the stock is basically pricing in that the installed base keeps growing and that services margins keep expanding. Let's talk about those margins, because I think that is the part that surprises people. Lucas: Yeah. Services gross margin is around 72 percent. Hardware is maybe 36 percent. So as the mix shifts toward services, the overall margin profile improves. Apple generated over a hundred billion dollars in free cash flow last fiscal year. That is more than Exxon, Chevron, and Shell combined. Luna: And what do they do with all that cash? They buy back stock. Which mechanically boosts earnings per share, which supports the stock price, which makes the market cap go up. It is a self-reinforcing loop. Lucas: Exactly. Apple has reduced its share count by about 40 percent over the last decade. So even if net income stays flat, EPS grows. And the board just authorized another ninety billion in buybacks this spring. At current prices, that is about 2.7 percent of the outstanding shares per year. Luna: And that is the part that gets underappreciated. People look at Apple and think, 'oh, it is a consumer electronics company growing at 5 percent, why does it deserve a 33 times multiple?' But if you factor in the buyback yield, the total shareholder yield is closer to 6 or 7 percent. Lucas: Right. And the dividend is growing too. It is now at about twenty-five cents per quarter, which is a yield of less than 1 percent, but the payout has grown every year since they reinstated it in 2012. So you have a company that is returning massive amounts of capital while still investing in R&D — twenty-five billion last year alone. Luna: Which brings us to the question: can this keep going? I mean, five trillion is a psychological milestone, but is the stock still a buy here? Lucas: I think it depends on your time horizon and your opportunity cost. If you look at a discounted cash flow model with reasonable assumptions — say, revenue growth of 5 percent, margins expanding modestly, buybacks continuing — you get a fair value around three hundred and fifty to three hundred and eighty dollars. At three thirty-three, it is not screamingly cheap, but it is not obviously overvalued either. Luna: But the market is clearly willing to pay a premium for quality and predictability. And Apple has both in spades. Lucas: That is the thing. In a world where the S&P 500 is at 7,534 and the ten-year Treasury is yielding maybe 4.2 percent, where do you find safety plus growth? Apple is one of the few names that offers both. And that is why institutions keep adding to it. Luna: You know, talking about that kind of capital return discipline reminds me of something. If our money conversations have helped you think about a decision differently — whether it is how you evaluate a stock or how you think about portfolio construction — there is a way to support the show that keeps it ad-free and independent. Lucas: Yeah. It is just buy me a coffee dot com slash fexingo. No pressure at all. It is a small way for listeners who find value here to help us keep doing this. And honestly, every bit of support means a lot. Luna: Exactly. Now back to Apple. One thing I have been wondering is whether there is another company that could realistically reach five trillion. Microsoft is at about three point eight trillion. NVIDIA is at about two point nine. But both have different risk profiles. Lucas: Microsoft is the most likely candidate, in my view. It has the same recipe: recurring revenue, high margins, massive buybacks. But it trades at a higher multiple — about 36 times earnings — and its growth has been more tied to cloud and AI, which are competitive and capital-intensive. Apple's moat feels wider because of the ecosystem lock-in. Luna: And NVIDIA? They have the AI chip monopoly today, but history says tech monopolies rarely last a decade. Lucas: Right. NVIDIA's revenue is still highly cyclical and dependent on a single product category. Apple has diversified across hardware, services, and now even wearables and health. It is much harder to disrupt a company that owns the user's entire digital life. Luna: So for the stock picker, the lesson might be that the market pays a premium not just for growth, but for durable competitive advantage combined with shareholder-friendly capital allocation. Lucas: Exactly. And that is a framework you can apply to any company, not just the megacaps. Ask yourself: does this business have pricing power? Does it generate high returns on invested capital? Does management allocate capital wisely? If the answer is yes to all three, the multiple might be justified even if it looks high on the surface. Luna: We should do a whole episode on that framework. But for today, the takeaway is: Apple at five trillion is a milestone, but more importantly, it is a case study in how consistent execution and capital discipline can compound value over a long period. Lucas: Absolutely. And as investors, we should study those compounding machines — not to chase the stock, but to learn the principles. Because those principles work at smaller scales too.