Money Rehab with Nicole Lapin - Apple Just Became the First Company to Hit a 3 Trillion Dollar Valuation. Should We Care?

Episode Date: January 17, 2022

We don’t need to be super financially savvy to know that $3 trillion is a big freakin’ number. Today, Nicole answers the questions: What does it mean that Apple’s broken this record… and how should it affect your investing decisions? Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today on Money Rehab, we're going to do what we do best.

Taking a jargony headline, breaking it down into plain English, and sharing how the headline affects you. So here's a recent headline. Apple becomes first company to hit a $3 trillion market value. We don't need to be super financially savvy to know that $3 trillion is a big friggin number. But what does it mean that Apple's broken this record? And why should we care? Well, market value is the same thing as market cap. If you missed our episode on market cap, here's a little refresher. So here's the deal. Market cap is a cute little nickname for market capitalization.

It's a measurement to help us understand to what extent a company is a big deal. First, I'm going to tell you how market cap is calculated, and then we're going to get into what it actually means and how you should consider market cap when investing. All you need to know right this very second is the big picture, which is that market cap is a number that represents the value of a company, specifically from an investing perspective. Before we can calculate market cap, we need to unpack one last jargony term, shares outstanding. Here's the dictionary definition. Shares outstanding is essentially the number of shares issued by a company. You can see why you would

want to know the details on a company's shares outstanding because that can really affect your payout as an investor. If you invest in a company and you know that this company has $1 million to split between all their shares outstanding, it makes a really big difference whether you're splitting a $1 million pot between two people or like a million people. Shares outstanding will tell you if you are a big sunfish in a kiddie pole or a teeny guppy in the Atlantic Ocean. And we use the number of shares outstanding to calculate market cap. To find the market cap, you take the number of shares outstanding and multiply that by the share price. So let's say I own a company and I have a share price of $20 and have 1 million shares outstanding. To get my company's market cap, I would multiply the $20

share price by a million shares outstanding and ta-da, we get a market cap of $20 million. In the world of Wall Street, market cap is often used as a metric to classify companies. In the last example, I had calculated a market cap of $20 million for myself. But in the stock market, that's not a lot of moolah. A company with a market cap of under $300 million is called a micro cap or a penny stock. Can you imagine calling anyone with 300 mil micro? Ouch. Okay, so let's work our way up the scale a little bit more. Above micro is a small cap company. A small cap company is a company with a market cap between $300 million and $2 billion. And then after that, we have mid cap companies. Those are companies

with a market cap value between $2 billion and $10 billion. And then we have the large cap status that is reserved for companies with market caps between $10 billion and $200 billion, with a B. If you can believe it, there is also a mega cap categorization, which is just everything more than $200 billion. So a $3 trillion market cap definitely makes Apple a mega, mega cap company, which has been Apple's status for a while now. In 1976, Steve Jobs put on his turtleneck and founded Apple, along with Steve Wozniak and Ronald Wayne. A cool 40 years later, they reached a market cap of $1 trillion. If you think that's impressive, try this on for size. Only two years after reaching their $1 trillion market cap, Apple doubled its market valuation and reached $2 trillion in 2020. And less than two years later, Apple tacked on another super cash trillion. And here

we are sitting at three trillion dollars. How the heck did they do that? Well, remember, typically market cap goes up based on stock price. Stock price is affected by many factors. So I'm oversimplifying here, but you can expect to see a company's stock price go up when they're enjoying some big success, like releasing an innovative product or racking up some serious revenue. It's safe to say that Apple has been checking off both of those boxes. According to CNBC, Apple sold 27 million of the newest AirPods model over the holidays. And Apple's services business, like App Store, Apple Music, Apple Podcasts, and others, grew almost 26% last year and brought in more than $18 billion in revenue in the last quarter alone.

Plus, there's always the trusty iPhone, which is still Apple's number one hot seller. Good for Apple. Now, let's dig into how this affects you. How should you be factoring market cap into your investment decisions? Conventional wisdom is that risk decreases as the cap gets larger. In other words, a large cap company like Apple is seen as too big to fail. On the flip side, it's generally suggested that smaller cap companies are riskier but have the most room for growth and a bigger payout for you, the investor. Sometimes these things are true, but not always.

To those who say large cap companies are always too big to fail, I would point you over to Enron. When Enron went under, its market cap was $65 billion. That being said, I don't think we have to worry about Apple becoming the next Enron. I'm not saying that. They are very legit. But Enron is a perfect example of the problem with making decisions based on market cap related headlines. Market cap doesn't tell the whole story about a company. That's my issue with people making big investment decisions based

on a handful of stats that show up on investing apps. You want to be making informed investment decisions based on how you think the company is going to grow. You can't make that informed decision if you're only looking at a snapshot of a company at one specific moment. You need to look at its history. So use the time that you would have spent calculating market cap to look at other indicators that the value of the company is growing, like a consistent rise in share price year over year, or an announcement

that the company is putting more money into R&D, research and development for some new cutting edge products or services. For today's tip, you can take straight to the bank. When it comes to investing, you should have a mix of large cap and small cap companies in your portfolio. Small cap companies stand to offer the biggest growth when it comes to payout. But if that company doesn't meet expectations, the large cap companies in your portfolio will save the day. in your portfolio to save the day. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.