Could Apple’s market capitalization reach $ 4 trillion in 2022?

Shares of the tech giant Apple (NASDAQ: AAPL) has skyrocketed in 2021. As of December 30, the stock had gained 34% in 2021. That brought the market cap to over $ 2.9 trillion.

While many recent headlines on the company have focused on its market capitalization approaching $ 3 trillion, investors might be advised to consider an even more bullish target: $ 4 trillion. Indeed, a close look at the stock suggests that a market cap of $ 4 trillion may be within reach for the tech company in the near future, possibly even by 2022.

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The path to $ 4 trillion

Close examination of the conservative valuation of Apple stock and the generalized momentum of the company argues for an undervaluation of stocks today, paving the way for a potential market cap of $ 4 trillion in 2022.

The first way Apple stock could win is by simply expanding its valuation multiple. Some mega-capitalized stocks trade at significantly higher multiples of their free cash flow (FCF) than Apple. If Apple can close the gap and get a similar premium, multiple expansion alone could help the stock grow significantly.

Consider that Microsoft (NASDAQ: MSFT) is trading at 42 times its free cash flow. Apple, meanwhile, only trades 31 times its FCF. Apple’s stock price would need to rise 35% for its FCF valuation multiple to match that of Microsoft. On its own, that would bring the company’s market capitalization to around $ 4 trillion.

There are actually good reasons for the valuation of Apple stock to experience multiple expansion in the coming years: the tech giant’s services business, which is a more reliable source of revenue than its products, increases as a percentage of Apple’s total business. With a more predictable and reliable revenue stream (which still appears to have a lot of potential) driving Apple’s growth more and more, investors can start rewarding the stock with higher valuation multiples. In fiscal 2021, Apple’s service revenue was 19% of revenue, down from less than 18% of revenue two years ago and 15% three years ago.

But even without this multiple expansion, strong fundamentals could drive Apple stocks significantly higher in 2022 and beyond. Consider that the company has recently experienced strong double-digit revenue growth, with record fourth quarter tax revenues across all geographic and product segments. Specifically, Apple’s fourth-quarter revenue was $ 83.4 billion, compared to $ 64.7 billion in the previous year’s quarter. But management estimates period revenues would have been $ 6 billion higher without the supply constraints during the period.

Suffice to say that Apple’s business is running at full speed. With momentum across all geographies and products, it wouldn’t be surprising to see double-digit growth rates in revenue and free cash flow for the business in fiscal 2022, providing a solid substance for more share gains.

Expect a bumpy ride

While it is possible that Apple’s market capitalization will reach $ 4 trillion before the end of 2022, there is no guarantee of investment. Even if all goes well for Apple as a company, the stock itself could do badly in the short term. Sometimes, for one reason or another, actions fall for and against. So even if stocks look undervalued today, stocks could fall before going up.

And there is always a chance that Apple will see multiple compression instead of a multiple extension. While Apple’s business fundamentals seem worthy of a similar premium to Microsoft’s, the company’s shares have generally traded lower than Microsoft’s in terms of valuation multiples, as Microsoft’s business model is considered more durable and less dependent on the success of successful products like the new iPhones. Apple also realizes more than half of its sales from a single product: the iPhone. Its heavy reliance on a single product segment generally causes Wall Street to view the stock as riskier than Microsoft, which has a business primarily consisting of recurring revenue from various sources of software and services.

But given Apple’s long history of pricing power, loyal customers, and the ability to bring products to market in entirely new categories from time to time, the tech company will likely continue to succeed – and its success. Market capitalization could reach $ 4 trillion.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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