Apple is the most valuable company in the US, with a market cap of $1.3 trillion. Apple’s stock is up 78% this year. What’s new with Apple in 2019? Revenues actually declined 2% this year, and earnings per share were flat. AAPL trades for 24x earnings. How do investors get comfortable with the type of growth that would be required—from what is already the largest US publicly traded company—to justify this type of valuation?
Microsoft is the second most valuable company in the US, with a market cap of $1.2 trillion. Microsoft’s stock is up 55% this year. What’s new with Microsoft in 2019? They’ve actually done quite well: revenue is up 16% and earnings per share are up 22%. However, MSFT trades for 30x earnings. How do investors get comfortable with the type of growth that would be required—from what is already the second largest US publicly traded company—to justify this type of valuation?
Amazon is the fourth most valuable company in the US, with a market cap of $0.9 trillion. Amazon’s stock is up only 16% this year, but is up 480% over the past five years. Amazon has shown solid growth this year: revenues up 20% and earnings per share up 17%. But AMZN trades for 80x earnings! How do investors get comfortable with the type of growth that would be required—from what is already the fourth largest US publicly traded company—to justify this type of valuation?
You’re probably starting to get the picture. When companies get this large, can they continue to grow at 20%+ for the long-run? I wouldn’t bet on it. And I don’t think most investors would either. What I think is actually happening here is momentum trading. When a stock goes up, more people rush to buy it. When it keeps going up, they buy even more. They feel great. But momentum trading is the exact opposite of the old stock market adage: buy low and sell high. Today investors are buying high. When prices are high, risk is also high. A lot of things have to go right over the next five to ten years for investors to make a good return on these stocks at their current prices.
But I don’t think most individual investors, and even most institutional money managers for that matter, think like this. I believe they think the price will go up because it’s gone up before and because these are great companies. I’ll be the first to say these are all great companies: Apple, Microsoft, and Amazon are among the most innovative, most extraordinary, most important companies in the world. They have all changed the world that we live in. However, a great company is not the same as a great investment.
