7 months ago • 2 mins
With a market capitalization of about $2.7 trillion, Apple is now worth a cool $100 billion more than the collective value of all the 1,909 stocks in the Russell 2000 index. And if that doesn't spin your head, it’s also worth more than every single stock listed on the Toronto Stock Exchange and stands almost shoulder-to-shoulder with the entirety of the UK’s FTSE stocks. We're talking about one singular stock that outshines thousands.
Now, don’t get me wrong: Apple’s not your average player. It’s one of the most valuable brands in the world. It’s demonstrated over decades that it can innovate and create new markets, always finding opportunities for growth and ways to preserve its high margins. It’s also now a much more diversified business, with a global presence and a strong balance sheet. And if there’s one company that’s likely to keep generating mouth-watering cash flows over the next few years, it’s probably Apple.
But the fact that it’s bigger than the entire small-cap universe brings up two interesting questions.
The first is whether Apple is just too big now. If this giant grows at 10% per year for the next decade, it’ll become a $7 trillion company – that’s about a third of the US’s current GDP and nearly a tenth of the world’s current GDP. This doesn’t mean that it can’t or that it won’t, but there’s probably a size after which growth will slow down. A company can’t grow faster than GDP forever, after all (or it would eventually surpass GDP, which is impossible).
The second is whether you’d rather own an exceptional tech giant like Apple, or all the smaller companies that compose the Russell 2000. If you forced me to pick for the next decade or two, I’d lean toward the Russell. Not necessarily because I’d expect higher returns, but for the safety of diversification, and a more comfortable valuation buffer. When you put all your eggs in the Apple basket, you're taking on a hefty load of company-specific risk. With escalating geopolitical tensions, the rise of generative AI technologies like ChatGPT, and the breakneck speed of tech evolution, there are some serious threats on the horizon.
That's crucial to keep in mind, because Apple's current valuation – relative to more diversified indexes – rests on the expectation of future returns that more than offset the extra risk. But there's a tipping point where the potential for higher returns won't be enough to justify the added risk, and that may eventually put a lid on Apple’s valuation.
Thankfully, you're not locked into an either-or decision: a “barbell” approach might give you the best of both worlds – that is, owning shares in Apple and the Russell 2000. In the end, an apple a day might keep the doctor away, but you need a diversified diet to live a truly healthier financial life.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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