Trillions Upon Trillions

Don't look now, but Apple is fast closing in on a massive $3 trillion market value. The iPhone-maker’s stock closed some 4.5% below that milestone today.

Apple stock has soared more than 40% over the past year, and has continued rising in recent weeks despite some negative headlines. Supply-chain disruptions have reportedly hindered iPhone 13 production—a big deal during the holiday shopping season. Apple’s core product makes up the bulk of its annual sales and profits, after all. The company's app store business model is also facing court challenges that could force it to make some profit-reducing changes.

But investors and analysts are looking further ahead. Apple has been long rumored to be working on new products in the augmented reality space, and also has a secretive autonomous vehicle program. Apple bulls see those efforts yielding big results in the coming years.

Here's Morgan Stanley's Katy Huberty writing in a recent research report:

Despite a consistent and material revenue contribution from new products and services over time, Apple shares don't seem to bake-in the impact from upcoming new product launches. We believe this will change as Apple approaches the launch of an AR/VR product over the next year.

For historical perspective, Apple's stock price has increased nearly 500% over the last 5 years (vs. the S&P up 105%) while iPhone revenue grew just 40% over the same period, suggesting new revenue streams, and not just iPhone, have driven most of Apple's recent stock outperformance. In 2014, Apple didn't even have a meaningful Wearables business, but today Apple Watch, AirPods, and other Wearables & Accessories are a $38 billion business—the size of a Fortune 120 company. Similarly, 5 years ago investors were overly skeptical of Apple's ability to monetize Services, yet today Services is a nearly $70 billion annual revenue business, doubling over the last 4 years.

Today, we know that Apple is working on products to address two significantly large markets—AR/VR and Autonomous Vehicles—and as we get closer to these products becoming a reality, we believe valuation would need to reflect the optionality of these future opportunities.

Huberty's model assigns more than $300 billion of value to Apple's future products including AR/VR and self-driving cars. Her $200 price target on the stock is about 14% above current levels.

Read more about the $3 trillion case for Apple stock from Barron's Sabrina Escobar here.