Open Forum: Apple and the Law of Large Numbers

By terms of market capitalization, Apple is the largest company in the world with a valuation that exceeds $487 billion. Yesterday, the New York Times touched upon this tremendous success that Apple has experienced. A potential downside to how big Apple is, however, is that it is now running up against the law of large numbers.

Essentially, what this theory means for large companies such as Apple is that significant growth earnings and rapidly increasing share prices will ultimately reach a plateau and begin to stabilize or drop. In other words, the theory explains that Apple will eventually get so large that investors will begin to question how the company can possibly get even bigger…

An excerpt from the report sums up how difficult it will be for Apple to keep increasing its quarterly earnings:

To increase its revenue by 20 percent, Apple has to generate additional sales of more than $9 billion in its next fourth quarter. A company with only $1 billion in sales has to come up with just another $200 million.

Cisco Systems is a notable example of a large company that fell victim to the law of large numbers. In March 2000, at the climax of the technology bubble, the networking company reigned as the world’s most valuable company with a market capitalization of $557 billion. Today, individual shares in Cisco have dropped nearly 80 percent and the company has a market cap of “just” $100 billion. Several other companies including Microsoft, General Electric, and Exxon Mobil have also felt similar effects over the past decade.

According to MacRumors, the iPhone and iPad have been the centerpieces of Apple’s fiscal success. In fact, these two devices have been integral to the year-over-year growth for the iPhone maker. As illustrated in the chart below, revenue growth for Apple is significantly less over the past three fiscal years when those devices are not accounted for. While Apple experienced 69 percent revenue growth year-over-year between 2010 and 2011, that number sharply decreases to just an 8 percent increase when you don’t include the iPhone and iPad in the equation.

While it remains a possibility that Apple can continue to piggyback off the success of its iPad and iPhone markets, the company will eventually have to launch a brand new product in order to ensure long-term viability. Just as it did with the iPhone in 2007 and the iPad in 2010, the folks in Cupertino will likely have to venture into a brand new product category. And, just maybe, that product will be the rumored Apple television set. But, what do you think? Is Apple going to continue to experience tremendous growth as it stands, or is it time for something new?

[New York Times via MacRumors] [Image: Flickr / nafdigitalassets]


Post a response / What do you think?