Is Apple Trying to Justify Its Valuation By Going into the Automotive Market?

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By Jacob Maslow

Apple store on George Street in Sydney
Sydney, Australia – July 14, 2012: An employee looks down from behind the glass facade of the Apple Store on George Street at dusk.

Let’s not fool ourselves. If Apple (NASDAQ:AAPL) were to stay primarily a phone company, it is not going to be worth one trillion dollars. It is not going to get past that one trillion dollar mark. It is just not going to happen. After all, how many times can you dramatically update the iPhone to warrant a massive buying spree?

By all indications, the iPhone 6 upgrade is a one-off thing. There may be some future product updates that may generate similar sales figures. But in the big scheme of things, those events are few and far between. Most changes to the Apple iPhone line are incremental.

With that said, it is highly likely that Apple won’t be able to beat those earnings figures. After all, the company has just registered some of the biggest earnings in human history. This brings us to market valuation. The market is excessively impatient with market valuations. Companies have to justify their stock pricing, or else, the downward pressure on that stock can be quite unbearable. No company is immune to this.

Pharmaceutical companies try to get around this by buying competitors that have a lot of new drugs and new technology in the pipeline. Computer companies, on the other hand, do this by buying smaller companies that are dominant in the growing sectors of the tech space. Apple could have tried this strategy of buying its way into growth to justify its valuation. However, considering the large amount of hype and cult-like following this company has, they had to do so in a completely different way that blows people’s expectations. Hence, there is the much-hyped foray into the automotive space.

It remains to be seen what completely new technology Apple will bring to the automotive table. The automotive industry is famous for being fragmented and often incremental in its technological evolution. Regardless of what happens, the fact that Apple is in the space should serve as a warning to automotive companies in Detroit and elsewhere to avoid complacency. Otherwise, they might fall victim to the increased expectations raised by Apple’s entry into the automotive space. Whether or not Apple can live up to the hype is a completely different matter. Regardless, it is giving investors at least some sort of hope regarding an upward room to move for Apple stock.

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