Breakingviews: Buffett’s $1 trillion target for Apple is in sight

Published Mon, Feb 27 20174:04 PM EST

Breakingviews

Robert Cyran

Warren Buffett's $1 trillion target for Apple is in sight. The Berkshire Hathaway boss has bought more stock in the iPhone maker – whose market capitalization at Friday's closing price was $717 billion – and reckons it might become the first company with a 13-digit valuation. Breakingviews first suggested that back in 2011. Growth has slowed, but the company still looks undervalued. The tech giant led by Tim Cook now trades at about 15 times estimated earnings for its financial year to September 2017. The S &P 500 Index trades at about 19 times projected earnings for the same period. Moreover, Apple has nearly $250 billion of cash and equivalents, such a huge pot that most of it is invested in long-term securities – a category excluded from standard cash and net debt calculations. More from Breakingviews : Warren Buffett risks losing his own winning wager The quantum and treatment are so unusual that it's worth valuing Apple and its massive hoard of ready money separately. Put the company's underlying business on the same price-to-earnings multiple as the S &P and it's worth around $850 billion. Add back cash, net of the iPhone maker's almost $90 billion of debt, and the company's potential market cap tops $1 trillion. Investors worry that the global smartphone market is saturated. Analysts think Apple's revenue will increase at a fairly modest six percent this financial year. However, as Buffett noted on CNBC on Monday, the company's products are "sticky," meaning most customers stay with the brand when they replace their phones. Services such as apps, online data storage, payments and music are steadily growing. Heavy investment in developing new products may yet produce another Apple hit, too. There's also the concern that Apple will make big, overpriced acquisitions. Yet there's no evidence for this. Cook is stingy – the company's largest acquisition by far in 40 years was its $3 billion purchase of Beats Electronics in 2014. It pays out roughly that amount every quarter in dividends, and on average about three times as much in buybacks. Perhaps investors simply can't get their heads around such a big number. If so, that could also be an issue for Saudi Arabia's state oil company Aramco, which is working toward floating with a possible valuation of $2 trillion. It wouldn't take much of a shift in investors' attitude to get Apple to the $1 trillion mark first. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

Warren Buffett, chief executive officer of Berkshire Hathaway Inc.

Jeff Kowalsky | Bloomberg | Getty Images

The tech giant led by Tim Cook now trades at about 15 times estimated earnings for its financial year to September 2017. The S&P 500 Index trades at about 19 times projected earnings for the same period. Moreover, Apple has nearly $250 billion of cash and equivalents, such a huge pot that most of it is invested in long-term securities – a category excluded from standard cash and net debt calculations.