via Apple at $1Trillion: The Missing Theory – Monday Note

“While we have much to be proud of in this achievement, it’s not the most important measure of our success. Financial returns are simply the result of Apple’s innovation, putting our products and customers first, and always staying true to our values.”  ~ Tim Cook, CEO @ Apple

In theory, Market Cap (market capitalization) is the simple multiplication of the price of shares that day by the number of shares “out there”. But for Apple, the number of shares outstanding varies all the time. Since the beginning of the calendar year, Apple has bought back — taken out of “out there” — more than $40B worth of stock. You would think that buying back a substantial number of shares (more than 200M) would reduce Apple’s market cap — and it did, by roughly 4%. According to the WSJ, if it weren’t for buybacks, “Apple Could’ve Been a Trillionaire Long Ago”:

Buybacks and dividends have rewarded shareholders but probably cost the tech giant the distinction of already being the first company with 13 digits

There’s another mystery twist, here: How did Apple get to $1T with such a poor price-to-earnings ratio (P/E)?…

This is where we get into some intriguing comparisons. Microsoft’s P/E is a solid 48 and Alphabet’s hovers around 50…but Apple’s is a meager 17. Caricaturing just a bit: “Apple still trades like a steel mill going out of business.” In more sober words, investor actions say Microsoft’s or Alphabet’s future earnings per share are safer than Apple’s, hence the premium they’re willing to pay. With a P/E of 50, Apple’s Market Cap would approach $3T…

…Apple continues to follow its heterodox path and to prosper as a result. There are two reactions to this annoying anomaly. One is to stick to one’s comfortable theories, books and speeches. “Just wait, Apple will meet its preordained fate. Sooner or later!”.

The other approach is to react the way physicists or mathematicians do when they see a crack in their theories. Can’t express the diagonal of certain squares as a ratio between two integers? Let’s invent irrational numbers.

… I think there must be something hidden-but-discoverable in the structure of the Apple machine…