24/7 Wall St.

It is no secret that stocks are in the middle of one of the greatest bull markets of our lives. The Dow Jones Industrial Average (DJIA) and S&P 500 have risen more than 300% from their March 2009 panic-selling lows, and the gains in 2017 were up over 25% on the Dow and up almost 19.5% on the S&P 500. Now we have seen Wall Street strategists call for even more upside in 2018 on the heels of tax reform and accelerated growth of earnings and gross domestic product.

If there is one stock that captures the love and interest of the investment community as the poster child of the bull market, Apple Inc. (NASDAQ: AAPL) would be the first name that comes to mind. This is by far the largest company by market cap, at $881 billion at the end of 2017. Some analysts are predicting that Apple will be the first public company ever to reach a market value of $1 trillion.

24/7 Wall St. has issued its annualized forecasting tool showing that DJIA at 26,400 and at least 2,855 on the S&P 500 seem to be the baseline targets for 2018. For this to occur, Apple almost certainly will have to play a role in the bull market’s nine-year run. In a bull-bear analysis of Apple, perhaps the real question is whether $1 trillion in future valuation is even enough?

As 2018 kicked off, the Dow hit 25,000 for the first time. The S&P 500 has blown through 2,700 like butter. The S&P 500’s total index market cap is $24.5 trillion, while the Dow’s total index market cap is almost $7 trillion.

Apple had a 2017 year-end price of $169.23, to generate its $881 billion market cap. That price gave it a weighting in the Dow of 4.78%, but despite its highest market cap the Dow’s price-weighted calculation made Apple only the sixth largest component by weight. The S&P 500 is a more realistic calculation due to a market cap-weighting methodology, and Apple was by far the largest weighting in that index. Apple also dominates the Nasdaq 100 for the highest weighting versus the entire index market capitalization of almost $8 trillion.

Apple was expected to generate a return of almost 16% in 2017. It almost tripled that gain with a total return of 46% for the year. And Apple’s year-end closing price came with a consensus analyst target price of $187.58 and a 1.49% yield, for a projected total return of over 12.3% in 2018, if the expectations come true.

So, what has to happen for Apple to become a $1 trillion company? Apple has continually outpaced the pack of analysts on expectations. If it manages to rise just the 12.33% expected in 2018, then the implied market cap would be right under $990 billion.

Apple’s year-end closing price of $169.23 and its consensus analyst price target of $187.58 sound impressive enough, but Apple shares already hit $177.20 back on December 18. After a year-end wave of small profit taking, Apple’s closing price after three days of trading in 2018 of $173.03 was up 2.25%.

Apple is viewed at the start of 2018 with at least some concern. Maybe that concern is misplaced as this stock has climbed the biggest wall of worry in history. The S&P 500 is now valued at close to 19 times expected 2018 earnings per share, but the mighty Apple is somehow valued at less than 15 times expected fiscal September 2018 earnings. Apple is also expected to grow earnings each year through at least 2020, and its dividend is expected to follow with more hikes as well.

The company had $229 billion in 2017 sales, and it has amassed more than $260 billion in cash.

Apple could also be a beneficiary under tax reform taking the corporate rate down to 21% from a nominal 35% for the United States. Apple is already a very international company, but its effective tax rate is closer to 25%. And Apple has well over $100 trillion that it can repatriate from overseas.

That repatriated cash poses a risk in the $1 trillion market cap chase. Apple has 5.13 billion shares outstanding, but Apple has been a massive acquirer of its own shares. That means Apple actually could shrink its float of shares further, and that might prevent the $1 trillion face value from becoming reality.

Another potential drag could be that Apple also said its devices were at risk due to security concerns embedded within its ARM-based and Intel CPUs. And there has been some concern that the Apple iPhone X has been disappointing to mixed since its launch. Instinet and others have voiced concern, but Piper Jaffray and others have been positive for a supercycle in Apple.

The consensus analyst target price of $187.58 has been trumped by many analysts on Wall Street. RBC has a $190 target, Wells Fargo has a $195 target, HSBC has a $193 target and Morgan Stanley had a $194 target.

Apple has been slow to move off of its reliance on iPhone sales. Still, the company has music and content sales, and its Apple Watch is expanding into a health monitoring device. It has launched smart speakers, and Apple has a role of some sort in the coming trends of connected and autonomous vehicles. And Apple’s Mac computer sales have been rekindled.

So, is $1 trillion enough for Apple’s future market value? We shall see, but we may get to find out in 2018 or in early 2019. Apple has a 52-week range of $115.75 to $177.20.

And for those who worry that 2018 could be a bumpier stock market ride than 2017, investors can consider lower volatility strategies in case a big correction looks more likely. The lower volatility might not apply to Apple with such big gains, but it’s hard to find any technology stock fund that does not own Apple.

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