: Here’s how Apple gets to a $2 trillion market value

Apple is currently the world’s most-valuable company. Apple’s market capitalization has topped $900 billion and seems on track to hit $1 trillion by year-end, with expectations for a strong holiday season.

Apple AAPL, -1.51% stock is preforming in line with my  2015 prediction, a forecast I repeated again this April, when such a number seemed outlandish.

So, what will it take for Apple shares to warrant a $2 trillion market cap?

Listen to Apple CEO Tim Cook and you’ll hear a fair amount of Buck Rogers-sounding futurism: Artificial intelligence that allows for self-driving cars, augmented-reality technology (which, demystified, is mostly a more realistic-looking gaming environment for now) and more.

Or you can keep the case for $2 trillion simpler: Apple has an already world-class hardware business that sold $141.3 billion of iPhones in the year ending this September, while its services business is up to $30 billion a year, growing at 23%.

“We expect a lot to happen with two to three years, and it will mostly be in services,” CFRA Research analyst Angelo Zino says.”The quickest way from $1 trillion to $2 trillion is to get a higher stock multiple on top of earnings growth. The longer they grow services at 20% or better, the better. Apple will get a better multiple as services become a bigger part of its pie.”

The biggest differences between the prosaic case and the Buck Rogers case lie in how long it might take Apple to double in value. But here’s what to think about when you ask, can Apple really get to $2 trillion?

First, watch services. It’s the most boring part of the case, but the most predictable, Zino says.

Right  now, services are just 13% of Apple’s revenue, Zino says. This could be a $60 billion business within four years, even with some slowing in growth. Services could soon produce 20% of Apple’s revenue and a third of its profit, Zino predicts. Morgan Stanley’s Katy Huberty adds that services could even grow 30% annually if people demand virtual-reality games and other AR-based services.

Services businesses also command higher multiples, as Zino points out. If we assume a $60 billion services business with 33% profit margins, services alone would generate as much as $20 billion in profit. (Apple made $64.1 billion before taxes in fiscal 2017). That could be worth an extra several-hundred billion right there.

Second, watch China and Asia. It’s easy to get carried away by China’s potential, Zino cautions. Apple’s sales to greater China dropped 17% in fiscal 2016 and another 8% in 2017, thanks partly to the financial-market turmoil there.  

Apple’s big issue in China is whether its consumers are rich enough to choose iPhones en masse. Morgan Stanley’s Huberty argues that Apple’s China recovery, which began earlier this year, will be accelerated by a shift to more-expensive phones like the iPhone X. She says Apple’s strength selling products in China suggests the real problem has been a lack of a compelling new iPhone.

“The number of aged iPhones in China due for an upgrade grew 56% this year, setting up for accelerating upgrades when a new iPhone form factor launches this fall,” Huberty wrote in August. “What’s more, the switching opportunity [from rival phone makers] is ripe in China….The combination of these factors drives our 66% bottom-up China iPhone unit growth forecast in FY18.”

Boosting China unit sales by two-thirds would add $30 billion in revenue, even if it took longer than a year. Apple trades at four times sales, so add about $120 billion to market cap for that alone.

Third, watch the tax bill. With $252.3 billion in cash held outside of the U.S., Apple stands to be the biggest beneficiary of Republican proposals to let companies repatriate offshore funds while paying only 10% as U.S. taxes, well below today’s rate of 35%.

The other thing to watch is the proposal to cut the corporate tax rate to 20%  on U.S. profits. Apple pays just 25% now, so a rate cut isn’t likely to be a bonanza for Apple, but it would help.

Fourth, watch the car revolution, but don’t count on it. No one knows what Apple will do about cars, Zino says — but it could be huge. No surprise why: Loup Ventures, co-founded by longtime Apple analyst Gene Munster, says the car market will see more change in the next 20 years than in the last 50. Nearly all new cars and light trucks will be electric-powered and mostly or completely self-driving by 2040, Loup predicts.

Apple probably won’t make cars, but Zino and Morgan Stanley’s Huberty both see Apple trying to become a major player in the software and services that make autonomous vehicles and driverless-car services practical.

Will Apple’s ideas outshine Alphabet’s GOOGL, +0.04%   or Uber’s? No one knows. Also, Loup’s forecast suggests the shift toward autonomous cars will be fairly backloaded, hitting critical mass in the 2030s — likely too late to drive the climb toward Apple’s $2 trillion valuation.

The best play is to hold Apple shares if you like the iPhone business, and be patient with the rest. That services will grow steadily is close to a lock. If a tax bill passes, it will help some.  With Bank of America Merrill Lynch saying Asian emerging markets face several years of growth before another recession, that rebound in Asia is another decent bet.

Those positives outweigh the fact that the futuristic Buck Rogers stuff may take a while. If AR and AI do become huge, they’ll push Apple toward $3 trillion or more — even if that now sounds like to infinity and beyond.

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