Apple’s brutal downdraft continues, down over $20 on the day as I write this (BR: closed 509.79 off -19.90‎. or -3.76%‎).

What’s the problem? Lack of lines for the iPhone5 in China? Maybe today’s catalyst.

We think, however, the market is coming to the conclusion the company has a scale problem. That is, it is just too darn large.

We posted earlier in the week about the relative size of Apple’s earnings. In the last four quarters, for example, Apple’s earnings totaled $41.7 billion, which was 21 percent more than the combined earnings of Microsoft, eBay, Google, Yahoo, Facebook, and Amazon!

For even more perspective take a look at the chart below. Apple’s average revenue estimate for next fiscal year is $222 billion, which, would rank as the 47th largest GDP out of the 186 countries monitored by the IMF.

Thus, with relatively little reoccurring revenue, Apple has to wake up on the first day of every fiscal year and generate annual sales of iPhones, iPads, and iMacs equivalent to Ireland’s GDP or a combined Hungary and Morocco. That’s a big nut.

This is a problem probably very few companies experience.

Is growth still possible? No doubt. And if any company can do it, it’s Apple. But the growth rate is starting to run up against a hard wall of the law of large numbers, or, at least, the perception that it is. Maybe this why the stock looked so cheap in terms of its PE during the last few years of extraordinary growth



(click here if chart is not observable)

Category: Technology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Apple’s Problem? The Law of Large Numbers”

  1. flocktard says:

    There’s obviously been a lot of chatter about Apple recently, but even before this slide, isn’t the stock trading rather cheaply, especially given it’s near mythic free cash flow?? Personally, I think they should split the stock and make it more appealing to smaller retail. That’s. I believe, is another “large number” that hinders growth.

  2. Lyle says:

    It is interesting that all large companies begin to hit the wall when their growth is limited by the growth of the world economy. Microsoft a while ago appeared to be an unstoppable juggernaut just like Apple has been recently. Both however ran into the limits of their market, in essence that their products have hit the part of the acceptance curve where growth slows (its late in the process) as demand is gradually satisfied. Apple have put themselves on a treadmill where they have to introduce new things and convince folks that they are the best thing since sliced bread, so that they rush out and buy it to keep growing. However eventually devices get to be good enough and that process no longer works (all be it in Apples case a lot of media hype their new products and they get a lot of free air time).

  3. philipat says:

    I agree that the Law of Big Numbers is an ever-present danger for large Organisations (And their Shareholders). However, innovation and the ability to continue to innovate at a rate faster than the competition is also an important process to manage. It is clear that it is difficult, yes essential, for a Company such as Apple to continue to introduce radical new solutions to problems that consumers don’t yet know they have.

    I am delighted with my Galaxy S3 phone and would not trade it for an i5. I shorted Apple when it announced its first Patent suit against Samsung because large Companies tend to turn to the Lawyers when they are no longer innovating fast enough. Unfortunately I covered too soon, months ago!!

  4. BennyProfane says:

    Isn’t it a tad obvious? Jobs has passed. Easy. His yes men are just that.

  5. victor says:

    1) short term: split the stock 10 for one and declare a special dividend as soon as Washington allows repatriation of foreign profits without double taxation.

    2)longer term: to avoid Wall Street’s penchant to knock winners off their perch aka the curse of the winner, split yourself into mini apples: AAPL retail, AAPL R&D, AAPL computers, AAPL mobile devices, AAPL TV, AAPL hardware, AAPL software and AAPL finance? Modern replicas of MaBell, Standard Oil? But whatever you do, DO not hire GS or the like to “advise”, when you only need a good accountant such as Earnst&Young” to help.

  6. James Cameron says:

    This is a discussion of the various forms of the law of large numbers:

    and as has been pointed out on many occasions these have nothing to do with how fast a company grows the larger it gets . . .

  7. Concerned Neighbour says:

    Yes, I’ve been saying this for a while. The other problem they’re facing is their huge margins. Some will probably stay loyal to the Apple luxury brand, but competition will be attracted by those margins and try to steal business away. Aside from Google/Samsung that are doing a fine job of this already, Windows Phone 8 and perhaps even a rejuvenated RIM with Blackberry 10 are now entering the fray.

    Another problem is their valuation. At 700, their forward P/E seemed attractive, but other metrics such as P/B and P/S were decidedly less appealing. I wouldn’t be surprised to seem them bottom out at $400, unless of course central banks buy more shares.

  8. wally says:

    Microsoft moved through a very similar arc. First innovation, then trying to protect the franchise by proprietary formats, overreaching license requirements, lawsuits and crushing of rivals, and lastly, riding on the cash accumulated during the good years.
    Apple is now on the middle part of that curve.

  9. Bob A says:

    “Winner’s Disease”
    like what Mikhail Gorbachev accused the United States of having.

    A few but by all means not all of the symptoms
    - failing to deliver what a large part of the market desires.. larger phones
    - shoddy uncompetitive Apple maps software
    - new incompatible overpriced cables
    - tired boring outdated interface that can’t be customized

  10. bobmitchell says:

    What is the actual link between AAPL and the GDP of Ireland? I’ve heard numerous times that AAPL uses an Irish tax shelter. What percentage of AAPL’s world wide sales end up being included in the Ireland GDP numbers?

  11. capitalistic says:

    Apple’s problem is that they don’t have a pure play comparable. So the company will always be perceived as “undervalued”.

  12. baychev says:

    What a strikingly manipulative rant! Yahoo, Facebook and Amazon combined have 0 earnings over the last year, nevertheless the author supports his scale problem by adding companies in ‘large numbers’ to his thesis.

  13. philipat says:

    @Victor and bobmichell

    Because of Transfer pricing methods on the supply chaim and the payment of Licensing, trademark and Royalty fees, it is possible to siphon off mauch of the profit through tax haven countries. Very little, if any, tax will have been apid on overseas operations outside the tax shelter and even US oprofits can get transferred out. What tax has been paid overseas will already have been taken as a deduction against US taxes because overseas taxes can be deducted as incurred but US Corporate taxes are only payable when the funds are repatriated. Cosy, hey?.

    Sp PLEASE don’t repeat the Tax lobbyists line that “To avoid double taxation” US Corporations should be allowed ANOTHER (One time again) tax free repatriation of profits. The American Middle class is getting screwed by this Corporatocracy so don’t make it any easier for them.

  14. Canada Joe says:

    Has nobody seen Tom McClellan’s Apple vs RCA chart? Why ask why? Try Bud Dry….oops damn TV…but

    “History doesn’t repeat itself, but it does rhyme.”

  15. dougc says:

    In order to increase sales they are going to sell updated version 3 months after I5, could the sheeple possibly be smart enough to assume that trend will continue or even accelerate? After suing their major and critical component supplier, the supplier raised prices. If the demand is so high why are they going to sell I5 through Walmart at a 30% discount?

  16. honeybadger says:

    And here I thought there problem was that I took a small position in their stock…

  17. constantnormal says:

    Some questions …

    When, if ever, has MSFT ever had a PE similar to that of AAPL?

    If Apple doubled their dividend, would it make a difference in their acceptance by the markets, or would it be seen as a sign of weakness, as an act of desperation?

    How much of the current decline is due to nothing more than the 1% taking MASSIVE long-term capital gains ahead of a likely near-doubling of their taxes on those gains? And how much of that money will return to AAPL, should subsequent quarters continue to report profit gains, even of “only ” 10-20% ?

    What are the odds that Samsung (or anyone else) would have brought to market smartphones similar to those they are currently selling, if Apple had not done so? How vibrant and exciting was the smartphone market prior to the iPhone?

    How many years have tablet computers been imagined, prior to Apple’s introduction of the iPad? Why have there been no previously successful products in that market segment?

    Now, I am not at all suggesting that such a thing is likely, or even desirable, but what would happen to Apple’s smartphone market share if they shifted to net profit margins half their current size? My thinking is that product prices would be cut in half. How competitive would try be, and who would their competitors be? How about if they did the same thing, on every product they sell? What fraction of the PC business would they get, what fraction of the tablet business, what would happen to their gross revenue?

    What fractions of the markets that they choose to compete in do they currently occupy? In which of them, if any, are they “effective monopolies”?

    An observation … Discussions about how Apple is too big, and cannot continue to grow, are not new, and have gone on for years … Maybe it’s just me, but I do not recall similar discussions about Microsoft, even when it had 95% of the PC marketplace, with software being MUCH easier to amass huge profit margins that hardware (hint: it is easier to stamp out DVDs than to assemble iPhones). Why was that?

    I’m just asking questions here … AAPL-haters can sheath their daggers.

  18. constantnormal says:

    @Canada Joe …

    I notice another coincident event in te chart you reference… The crash of ’29 coincided with RCA’s big slide, followed by the Great Depression. Are you suggesting that we are about to “go over the falls” one more, with a similar collapse in the stock markets?

  19. constantnormal says:

    I would contend that the “Law of Large Numbers” has more to do with ratios and proportions than it does to the actual size of the numbers.

    The ONLY number that AAPL has an outsized ownership of is market cap. A responsible look at product market share would indicate years of growth are possible, even if it never entered/created another market.

    But that is sufficient to invoke the Law, and have it stick.

    What could Apple do about this? If they split the company into separate parts (just for te sake of the exercise, let’s say media, mobile devices, and computers), would that get around the Law?

  20. wcmatt says:

    In full disclosure I’m long AAPL, but these are just ridiculous comparisons. They’re not meaningful.

    If we’re going to talk about GDP, let’s throw another number out there. Worldwide GDP in 2012 is expected to be something like $81 trillion USD, give or take. That’s 81,000 billion. Apple did 156 billion in revenue in the 12 months ending Sept 29, 2012. So they booked 0.00192 of worldwide GDP. And they’re a market leader in multiple industries touching nearly every individual and organization participating meaningfully in that worldwide GDP figure.

    Now, you can say comparing Apple’s revenue to WW GDP is preposterous, but it’s no more silly than comparing it to the GDP of Hungary. It’s probably quite a bit less silly, in fact, but that’s beyond my point.


    Since we’re looking at big numbers, let’s look at a few more. The mobile phone market in 2012 is expected to have been somewhere around $250 billion US. Given this number includes smart phones, that number will probably be at least $350 billion by 2015. Also in 2015 the PC+tablet market will significantly exceed $400 billion. I don’t have any industry reports in front of me so this is all hugely rough back of the napkin, but that alone is $750 billion in addressable market just 36 months from now. What was Apple’s 2012 revenue again? $156 billion. Hmm, maybe that Apple number is beginning to look a little more modest in context. Still a big number, absolutely, no doubt about it. But an ungrowable number? No way.

    Speaking about growth, how about a few more numbers? Smartphone CAGR over the next 5 years estimated to be 24.9% by research firm Ovum (I have no affiliation. I am not a customer of theirs). Tablet CAGR estimated to be 22% over the next 5 years (again, Ovum, eg see here: Now granted those growth rate figures are units, not dollars, but you can slice and dice your bearish scenarios a few different ways so looking at it from this perspective, if you conservatively assume Apple can ROUGHLY maintain their margins and only grow their units by half the industry rate, they will EASILY be earning 30% more per share in 36 months. And this is really is a conservative and basic scenario.

    With a forward P/E of less than 9, the market is currently pricing Apple at essentially no growth beyond next fiscal, and so I’m happily adding to my position at recent prices.

    A few other comments have touched on this, but a better analysis is to look at how good the products are relative to the competition. Apple faces some very good competition on the smartphone side. Android is better at some things. iPhone is better at some things. Less of a contest currently in the tablet space. But beyond the individual products, I think we’re you’re going to see the most obvious improvement is the integration between Apple’s products. There’s a lot of opportunity there and time is money to many people. Many of us are going to have 2 if not 3 of these devices in our lives (laptop, phone, maybe tablet) going forward. I hold a position in Google too, but the integration Apple is in a position to achieve, and the pain points that integration can reduce or solve outright is an advantage that Google will not be able to match anytime soon.

  21. wcmatt says:

    Apologies for the typos. It’s late. I apparently can’t edit my post.

    “This really is a conservative and basic…”

    “I think WHERE you’re going to see…”

  22. constantnormal says:

    Both XOM and WMT have (existing) revenue that is more than double AAPL’s “projected” revenue. I suspect one could make some more spectacular country comparison charts with those companies …

    Exactly what business lines are Ireland, Czech Republic, Hungary, and Morocco in, and how do they relate to the Republic of Apple?

    BR, I respectfully suggest that you can do better … How about an analysis of the likely amount of long-term capital gains that were present in AAPL holdings, and what fraction of those have been taken, and remain to be taken?

    If that is a factor here, where will that money go to achieve similar rates of compounding?

  23. philipat says:

    The Law of Big Numbers is, recently, most frequently used by the China-bashers. Illustraed as follows:

    China is growing at 10% PA on a base of 100 for 10 years.

    Then, after those ten years, China is “Only” growing at 5% PA. Disaster!!!!

    What does that really mean:

    Growth of 10% PA on the base of 100 means that the economy grew 10PA from 100 to 260 in absolute terms during the ten years.

    Growth after the ten years on the new base of 260 at a rate of ONLy 5% is now 13PA in absolute terms.

    That is the Law of big numbers. The problem these days is that so many folks don’t understand numbers and basic math.

  24. constantnormal says:

    I beg your pardon, I just noticed, Mr Ritholtz (sir), that you are not responsible for authoring the (meaningless) country-comparison chart … still, it would be nice to see some thoughts about how much of the AAPL selling has been related to capital gains taxes, and whether those sales have knocked the floor out under AAPL shares, and whether we might see this rout spread to the market in general, especially given AAPL’s large market cap.

    At what point does this become “panic selling”, and when is it overblown? I suspect that Fusion IQ has some sort of sentiment gauge that might shed some light here … Or possibly some TMA metric?

  25. constantnormal says:

    So strange, to see a topic generating as much talk as this, about a company that makes excellent profits and grows into new markets, as if those things were a symptom of failure or senescence … especially when it is not a company with an especially ginormous revenue (large, yes, but there are many larger companies in terms of revenue), or a monopoly position in (almost) any of its markets (iTunes music sales being the exception here).

    In terms of its growth rate, it stands out, but it is the fact that the stock market has recognized that combination of zero debt, unprecedented product innovation (how handy other companies have successfully expanded into as many markets as this one?), and ridiculously efficient operation on a global scale, that has driven its acceptance in the stock market, and yet by most measures it has not really been “bid up” in price (compare AAPL’s PE to that of AMZN, which pours every last nickel into expanding it’s business, reporting next-to-no profits on a consistent basis) … How far can AAPL fall?

    If price is the only measure, quite a long way … it would be interesting to see Apple’s management convert it to a “safe dividend” stock, a value holding that still grows revenue and earnings, like MSFT … If AAPL were valued similarly to MSFT, it would have to jump in price by over $100 …

    Perhaps a 10:1 split would make it less susceptible to being able to be moved by larger players in the markets, but I doubt it, as it is not the number of shares outstanding, but the degree of wealth concentration that makes it possible to move stocks with as large a market cap as this …

    An entertaining sideshow, one that a lotta other companies must be glad is not happening to them …

  26. constantnormal says:

    “How handy other companies” should read “how many other companies” …

    That does it. I’m turning off the auto spell correction. Any misspellings from this point on will be mine alone.

  27. peachin says:

    I agree with a previous statement – Samsung III – in the form of NOTE 2 – it’s a game changer… not better, maybe…. but excellent in every way – Note 2 is a LARGE Phone and a Small Tablet – in one – hard to find a flaw – and the combo doesn’t seem to have a comprimise in being both…. “The Woz” has one and is shouting its merits.

  28. econimonium says:

    I like reading comments that talk about all sorts of company technicalities but don’t consider the products/services the company is involved in and the market conditions that surround them. I do believe that the author’s “law of large numbers” really should be rephrased “market saturation point” because, in essence, that’s what he’s talking about…the point where the demand curve starts to level off or even decline because you’ve reached everyone you can, and the replacement become subject to competitive pressures.

    Let me remind you where Apple currently derives it’s money: phone and now the tablets. Have any of you used/tried out the new phones from Samsung? Actually used the Nokia Microsoft phone with it’s tiled interface (honestly, a market killer if they can get it out there)? How many tablets are already out there? What’s the saturation point with those? Will people just upgrade to have the latest one, or are they starting to tire of that? Has Apple got more innovations up its sleeve here, or are they sticking with the (now) same tired old UI? Anyone who’s read my comments here knows I’m not really a fan of Apple for many reasons, but let’s stick with the analysis. Phones are now very, very competitive. Tablets have a bit to go but soon they’ll saturate also. Where is Apple going? Any indication? Apple TV? A bomb waiting to happen as it already once did. So the real point here is this technical consideration and where you line up on it. Personally I think that Apple is going to face some very heated competition price-wise and its margins will suffer. It’s also going to face some pretty serious technical competition in bigger/faster/less proprietary devices and it needs a serious re-boot of its UI too. How that plays out is what you’re betting on when you buy or are long Apple.

  29. eideard says:

    The usual and diminishing herd of Android baby sheep are here. A fair number of folks who rely on Talking Heads to provide analysis of Big Tech. Yawn.

    Apple is in as much danger of collapse as BMW or Mercedes. As likely to suffer a reduction in real value as any firm that transformed a quality niche into a mass market consumer phenomenon. The first thing either crowd has yet to learn is that critical, skeptical reviews have nothing to do with market popularity – as much as the critics love to pat themselves on the back as kingmakers. The second only requires a quick peek at weekend sales of iPhone5 in Beijing – golly, only 2 million – or sales of the iPad Mini since introduction a few weeks back – golly, only 12 million.

    That’s egg on your face – not Socrates’ beard.

  30. Bob is still unemployed   says:

    @wally – Microsoft moved through a very similar arc. First innovation, then trying to protect the franchise by proprietary formats, overreaching license requirements, lawsuits and crushing of rivals, and lastly, riding on the cash accumulated during the good years. Apple is now on the middle part of that curve.

    In addition to your spot-on fundamental observation, I would also add that Apple’s stock price is the result of supply and demand. Just how many buyers are there remaining who want to buy Apple’s stock? Main Street most likely has purchased all the AAPL they will ever want to.

    How can the Apple hype get any louder? A friend of mine just purchased an android phone “because it is not Apple.” Is there an anti-Apple sentiment simmering away in the background?

  31. Bob,

    with..”…How can the Apple hype get any louder?…”

    Good Question. personally, I think saying that ~”We saw peak-AAPL-hype, in ’012..” is a ‘lay-up’..

    also, this..”…A friend of mine just purchased an android phone “because it is not Apple.”…” the ‘new Black’..

    more people are equating..

    “…Some will stay loyal to the Apple luxury brand…”

    to those heard, telling ‘the Genius’..”I want the one with the more GBs..”

    also, the ‘Tapestry’, of Apples’ Brand, is replete with threads(memes) that don’t bear scrutiny..

    “It just Works”

    “Apple’s OS is virus-free”

    “Designed in Cupertino..”

    at the beginning..

    getting ‘More for Less’, is one thing..Paying ‘More for Less’, is another..~

  32. large J says:

    these are some really disappointing comments.

    The Big Picture has generally been a place where qualitative analysis has taken a back seat to — making points with numbers and facts. These are a series of comments about irrelevant comps and the law of large numbers…How about some facts to perhaps shed a little clarity:

    so most apple haters have reiterated the news that there were only 2 people online to get the new iphone5. That’s because they were sold by appointment and in fact 2mm were sold in 3 days setting a new China sales record. Talk about bad journalism.

    As of Sept 2012 Apple had shipped 26mm phones…Samsung had shipped 55.5mm…so much for there being no room to sell more. Perhaps more importantly Apple had increased unit sales 57% year over year in a market that grew by 70% thus losing nominal market share…not bad the market is growing so fast that your 57% sales volume growth doesn’t keep up.

    According to Gartner Worldwide Mobile Devices sold 170mm units in three quarters of 2012 versus 100mm the prior year…iOS has a 14% share…last i looked that’s not saturation.

    How about profitability? If Apple has no growth this year (Fiscal 2013) Free Cash Flow net of Cap Ex will be roughly $40billion or 8.4 times Enterprise Value.

    Go ahead and short that. I dare you . See you in a year to see how this “Too Big to Grow” concept played out against hard numbers.

    Good Day Sir!

  33. philipat says:


    Sounds like Large J comes from Street K?

    Disclosure: I WAS short AAPL but folded too soon. I for one am no AAPL hater but just had reservations when APPL started deploying lawyers instead of cuuting-edge new technology. I have bought many AAPL products over the years and still use the tablet. But my S3G phone is a thing of wonder and I wouldn;t change it for an i5 EVER.

    The markets, at least before they got completely broken by the Central Planners, are FORWARD looking indicators, so present EV and Cash Flow doesn’t, necessarily, matter?? Just Sayin’

  34. [...] was obvious that Apple had to eventually run into the law of large numbers. Perhaps less obvious was the law of activist fund managers. No matter how much money a company [...]