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Aug 10, 2020

Apple rises with valuation closing in on US$2 trillion milestone

Photographer Timothy Mulcare, a Visual Supply Co. (VSCO) ambassador, holds an Apple Inc. iPhone 7 Plus smartphone outside of the company's Williamsburg store in the Brooklyn borough of New York, U.S., on Friday, May 20, 2017. Apple Chief Executive Officer Tim Cook said in May that the company planned to invest at least $1 billion to back advanced manufacturing companies in the U.S. and help create jobs in the industry. Photographer: Mark Kauzlarich/Bloomberg

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Apple Inc. shares rose in premarket trading Monday, extending a recent advance that has brought the company within striking distance of a historic US$2 trillion valuation.

Shares rose 1.5 per cent before the bell and have almost doubled from a March low. Much of the iPhone maker’s recent surge came in the wake of second-quarter results that were much stronger than expected. Retail investors have also been positive about a planned stock split.

Based on Apple’s most recent close, the rally has resulted in a market capitalization of US$1.9 trillion, meaning it will need to rise a little more than 5 per cent to surpass the level. Wedbush, which raised its price target to the highest on the Street over the weekend, said reaching the threshold was “on the near-term horizon,” and that there was “a lot more fuel left in Cupertino’s tank heading into 2021.”

Apple’s rally makes it the most valuable company in the world, having recently surpassed Saudi Aramco in size. It now holds a steady valuation lead over Microsoft Corp. and Inc., the second and third largest U.S. stocks, both of which have market caps around US$1.6 trillion. Apple’s valuation is equal to about 85 per cent of the combined market capitalization of the entire Russell 2000 Index.

The iPhone maker’s size gives it an outsized influence in the stock market overall. It has a weighting of 6.5 per cent in the S&P 500, making it the benchmark’s single largest weight in 40 years. As the top two components, the combined weight of Apple and Microsoft is also at a multidecade high, according to data compiled by Bloomberg and S&P Dow Jones Indices LLC.

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‘Give Us Pause’

Some analysts have expressed caution about Apple’s recent advance. Deutsche Bank on Monday wrote there were multiple factors “that give us pause for [the] magnitude and speed of the rise,” including its price-to-earnings ratio, which is above the long-term average.

“A mean reversionist perspective would bias one to have a more negative tilt” on the stock, Deutsche analyst Jeriel Ong said. Despite the rise in the stock, “gross/operating margins aren’t terribly higher,” and “top-line growth hasn’t really accelerated over time,” he said.

The bank reiterated its buy rating on the shares and raised its price target to US$480 from US$440. However, it predicted that future gains “will need to be increasingly revenue and EPS driven” as opposed to valuation driven, “perhaps limiting the ceiling for stock upside.”

BofA downgraded Apple last week, citing the rally. “While there are many reasons to explain this relative outperformance,” it said, the move likely isn’t “sustainable in the near term.”

While there are “many positives” for Apple, analyst Wamsi Mohan said that “risks should not be ignored.”