Is Apple (AAPL) too big to grow?
Apple is a $740 billion stock. Its revenues over the past 12 months are equal to the entire New Zealand economy. Over the past 15 years the stock has been what Peter Lynch calls a 100-bagger. All you had to do was predict that they would invent the iPhone, and you’d be rich.
And yet because of its size, the company trades at a modest valuation. Lots of analysts are saying it’s downright cheap. It’s been so profitable that Apple’s cash-hoard is roughly equal to a year’s revenues. Adjusting for this, the market cap is less than 10 times projected earnings. This is almost equal to a growth-free valuation. What’s going on?
Some call this the “Law of Large Numbers,” but that’s a misnomer. The Law of Large numbers is a statistical principle that describes the results of performing the same experiment many times, like rolling a die.
What investors are really concerned with are diseconomies of scale, forces that cause large firms to have increasing per-unit costs, through communication challenges, duplication of effort, office politics, and so on. Investors are also worried about market saturation. When a company has a 1% market share, it’s easy for sales to double. When it has a 90% market share, this becomes impossible, unless the market itself doubles in size.
These factors have inhibited the growth of biggest-in-the-world companies before: GM, GE, IBM. They became management monstrosities, with too many layers and bureaucratic infighting. Often, the best performing people were forced out. That hasn’t happened to Apple yet, but these potential problems explain the company’s 20% valuation discount to the rest of the market.
So far, Apple has continued to grow by redefining what its market is and expanding overseas. Can Tim Cook and his team keep this up? That’s what all of us would like to know.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!