In today’s Exponential Investor

  • Same old, same old
  • An Apple a day keeps inflation away
  • Does this sound right to you?

We’re now on the fifth day of 2022. After returning to the office this week, to my great surprise, having returned to the office this week… nothing has changed in the markets.

I shouldn’t have expected any different to be fair. The leap from one year to the next is really no different from the leap of one week, or even one day, to the next.

So watching the stock market continue to deliver eyebrow-raising events… well, that’s just part and parcel of what we’ve seen throughout most of 2020, 2021 and, now, 2022.

More of the same…

That also means it’s pretty unlikely anything is going to change for a little while yet.

A key driver of this all is the continued existence of low interest rates, cheap money (thanks to loose central bank monetary policy) and, of course, inflation.

Yes, inflation. You see, inflation is something that hits our pockets in more ways than simply the cost of filling up the car or keeping the heating on.

Inflation also impacts the market — but not always in a bad way (so long as you’re a market participant).

Let me explain some more…

What’s a few trillion between mates?

This week, Apple Inc. (NASDAQ:AAPL) hit a market capitalisation of three trillion dollars.

In numbers that looks like $3,000,000,000,000.00.

That’s a lot of zeros.

Apple is also a profitable company. There are plenty of reasons to suggest that $3 trillion is a fair valuation for the company.

From the start of last year through to 30 September 2021, Apple’s annual revenue was $365.8 billion. Its net profit after tax was $94.6 billion. Based on that, Apple trades at 31.6 times net profit. That’s high, but not insanely high.

The question however must be asked, how does Apple make so much money? Well, it’s quite obvious, right?

They sell great products. But selling a great product alone isn’t going to get you $365 billion in revenues. You need a great product selling at a great (i.e. large) price.

Have you ever bought a brand new Apple device?

The “cheapest” iPhone available in the Apple store right now is a £389 iPhone SE.

The most expensive iPhone an iPhone 13 Pro with 1TB storage at £1,549.

In 2007 when the iPhone was released, it was still an expensive phone. But at £457 for the top line model, it’s some way off what you’re paying for the top line model today.

In fact, if you’re looking at inflation, then when it comes to iPhones, the inflation rate over the last 14 years has been 239%.

Comparatively, the cost of petrol in 2007 was about 95p. Today it’s about 145p. That’s about 52% over the last 14 years.

People lose their minds over the inflation of the cost of petrol… but where is the protest over the inflation of the cost of iPhones?

In the UK, Apple’s iOS (its mobile device operating system) had a penetration rate of 51.15% (as at March 2021). In short, half of all households in the UK have iPhones.

This is a company that has really nailed its market and makes a truck-load of cash while going about its business.

But it makes so much money, its stock trades at such a high price and its valuation is so high because every year the company charges more for its products, maintains its customer base and continues to sell more and more of its products.

Had the inflation of iPhones been 50% over the last 14 years… or even zero… I wonder if Apple’s stock price would be anywhere near where it is now.

The fact is that asset price inflation is a result of price inflation which is a result of cheap money, low rates and loose central bank controls.

And none of it is about to change.

So, perhaps Apple will continue to charge on, grow its revenues, and see its stock price inflate along with a world of inflation. If you’re trying to outperform inflation, then maybe a company like Apple – even at a $3 trillion valuation – is something to think about…

Making cash or making dreams?

While Apple is a cash-generation machine – a profit-maker extraordinaire – not all companies with valuations over $1 trillion boast the same financial chops.

This week, Tesla said it had delivered more cars in the fourth quarter of 2021 (about 308,000) than expected and “annual handovers” were up to 936,000.

As a result, Tesla’s stock jumped 13%, equating to an increase in market capitalisation of around $140 billion.

To give that some perspective, Tesla’s single day valuation increase was more than the entire market capitalisation of Volkswagen group.

For the third quarter of 2021, Volkswagen sold about 122,100 pure-electric vehicles (EV) globally. And its running total for the first three quarters of 2021 was about 293,000 – so on track for about 400,000 EVs for all over 2021.

That’s not quite as many as Tesla. But bear in mind that Volkswagen still delivered 8.1 million cars globally (as at November 2021).

Further, if you look at Volkswagen’s European data, from January to September 2021, the company sold around 155,000 EVs. Tesla on the other hand, 77,000.

Those numbers would suggest that Tesla is strong in the US market, but that its sales aren’t as rosy in other regions. And with companies like Volkswagen, Mercedes and BMW all releasing new models into the EV market, perhaps Tesla’s time at the top is running out.

Also, with Ford set to increase production of its F150 EV two-fold to 150,000 vehicles per year, Tesla may face some domestic competition too.

Of course, the stock price isn’t bothered. At a price of $1,200 per share ,a market cap of $1.2 trillion and generating just $690 million profit, Tesla’s stock trades at 1,739 its net profit. But still, Tesla’s stock appears to only head upwards…

The market is wild. Or, at least, it might seem wild in places.

In Tesla’s case, yes, it is wild. And while Apple’s valuation might seem crazy, in a world with rising inflation, is it really that excessive?  

Regards,

Sam Volkering
Editor, Exponential Investor