As Apple Inc. (NASDAQ:AAPL) remains tantalizingly close to becoming a trillion-dollar company, the rising valuations of several Internet firms are causing some analysts to consider whether one of them might beat the iPhone maker to that lofty level. While many analysts see a high likelihood of Apple becoming the world’s first trillion-dollar company, one analyst thinks another company will beat the iPhone maker to it.
Apple’s route for becoming the first trillion-dollar company
In a note late last week, MKM Partners analyst Rob Sanderson focused on the race to become a trillion-dollar company, among Apple, Amazon, Alphabet, Facebook, Alibaba and Tencent. He suggests that multiple companies could be valued at $1 trillion within the next two or three years.
Apple is widely expected to become the world’s first trillion-dollar company, and the number of analysts focusing on this aspect of their thesis grew in 2017 along with the company’s stock price. Apple’s market capitalization touched $900 billion in late 2017 but has since fallen back into the $880 billion-range. As a result, the excitement around the $1 trillion market cap has ebbed slightly.
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Sanderson noted that Apple is the closest to becoming the world’s first trillion-dollar company but added that its proximity doesn’t guarantee that it will be the first to reach that milestone. He pointed out that volatility around the iPhone X cycle is heightened. Further, he said that although earnings estimates for Apple have increased, consensus suggests that Apple won’t hit a $1 trillion market cap until 2020.
That’s based on the consensus estimate for calendar year 2019—which he says would garner a $925 billion market cap in 2019—plus 9% growth in earnings per share for 2020 and the current forward P/E of 13 times.
Alibaba to beat Apple to become the first trillion-dollar company
Sanderson avoided weighing in too heavily on Apple because the company isn’t in his coverage universe. However, his predicted timeline for Alibaba Group Holding Ltd (NYSE:BABA) to become a trillion-dollar company brings it to that level before his projected timeline for Apple.
He noted that online shopping is growing at a pace double the rate it’s growing in the U.S. He explained that consensus puts Alibaba’s growth outlook for calendar year 2020 at 30%. He added that if the company maintains its multiple of 24 times, then its market cap could reach $720 billion by 2020. However, to put this into perspective, he added that consensus also points to a “meaningful slow-down to 41% growth” in 2018 followed by 30% in 2019. Further, he pointed out that the Chinese e-commerce giant has beat projections “by a very wide margin” recently.
According to Sanderson, consensus for fiscal 2017 pointed to a 40% increase in sales, and Alibaba management had guided for 48% growth before delivering a 56% increase. For fiscal 2018, the company guided for a 49% growth rate, and consensus originally stood at a 32% increase. Through the first half of the fiscal year, Alibaba is tracking at 58% growth, and the MKM analyst expects the company to beat consensus again, possibly by a substantial amount.
In order to become a trillion-dollar company by 2020, he believes Alibaba needs to check all these boxes: upside of 20% to current consensus for calendar year 2018, 45% earnings-per-share growth in calendar year 2019, and outlook of 40% growth in calendar year 2020. If the Chinese giant fulfills each of these metrics while maintaining its current forward P/E/ of 24 times, then its market cap might exceed the $1 trillion mark in 2020.
Will Alibaba really beat Apple?
Apple perma-bulls have argued within the two months that the iPhone maker could become the world’s first trillion-dollar company as early as 2018. Drexel Hamilton analyst Brian White has had a price target of $235 on Apple stock for some time, and that price will put the company’s market cap over $1 trillion. But as bullish as he is on Apple, chart technician Todd Gordon seemed to be more bullish in November, when he told CNBC that the iPhone maker’s market cap could hit $1 trillion by the end of 2017.
Obviously, that didn’t happen, and it could take longer than some would like to find out if Apple, Alibaba or another company will be the world’s first trillion-dollar company. Apple bulls have been excitedly looking forward to a $1 trillion market cap for several years, and the number of speculative reports about when it might happen surged in 2017, along with the company’s stock price. In the days when analysts first started to think about Apple becoming the world’s first trillion-dollar company, Alibaba wasn’t even a blip on U.S. investors’ radar.
Alibaba stock rose 6.51% to close at $183.65 on Tuesday, while Apple stock closed up 1.79% at $172.26.