To Beat the Law of Large Numbers, Apple Must Expand Its Product Line

[MacRumors]

The New York Times today addressed Apple's record growth in both revenue and stock price in the context of the "law of large numbers".

Apple is so big, it's running up against the law of large numbers.

Also known as the golden theorem, with a proof attributed to the 17th-century Swiss mathematician Jacob Bernoulli, the law states that a variable will revert to a mean over a large sample of results. In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger.

If Apple's share price grew even 20 percent a year for the next decade, which is far below its current blistering pace, its $500 billion market capitalization would be more than $3 trillion by 2022. That is bigger than the 2011 gross domestic product of France or Brazil.

Put another way, 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.

Apple has posted annual revenue growth of 16%, 56%, and 69% over the past three years respectively, with sales rising from $39 to $61 to $103 billion. Staggering growth for a company this large, but Apple seems to be continuing the trend for fiscal 2012. Apple reported more than $46 billion in revenue for the first quarter, and provided guidance of $32.5 billion in revenue for the second quarter.

This $78 billion in revenue for the first half of fiscal 2012 (which will likely be higher, as Apple traditionally underestimates on guidance) represents yet another massive increase in revenue from the year-previous quarters. The Q1 2012 number is a rise of more than 73% over the prior year, and the Q2 guidance would represent a 32% increase growth.




The enormous growth Apple has shown in recent years is largely on the backs of two products: the iPhone and the iPad.

The iPhone, as a product category, has grown from a mere $630 million in sales in 2007, to more than $47 billion in fiscal 2011. The iPad, for its part, tallied more than $20 billion of Apple's revenue last year. Between the two of them, Apple's main iOS devices account for more than 65% of Apple's total sales. Remove those two and Apple is a much different company.

It's all a bit of a theoretical exercise, of course. The iPhone and iPad halo effects are real, and have had a beneficial impact on other parts of Apple's businesses -- but the point remains: Apple's astounding growth is the direct result of the company's move into new product categories.




As the above chart shows, Apple's overall year-over-year revenue growth is impressive, but if the iPhone or iPad is backed out, the revenue growth is much less awe-inspiring. Without the iOS devices, Apple only showed 12% and 8% revenue, versus 56% and 69% otherwise.

To continue doubling its total revenue every two years, there are two main possibilities:

Apple would need to show extraordinary -- perhaps impossible -- growth in its iPad and iPhone divisions. Massive sales growth from the iPhone (which has grown more than 90% each of the past three years) and iPad can drive Apple's revenue growth for quite a while, but not forever.

If the iPhone were to continue its 90% annual growth for two more years (which would count 5 consecutive years of near 90% annual sales increases), in 2013 Apple would have nearly $170 billion in revenue coming just from the iPhone. The iPad, which grew an astounding 330% from 2010 to 2011, would report $78 billion in sales that same year -- $248 billion between the two.

Impressive (hypothetical) growth, and given Apple's astounding first quarter numbers, perhaps doable. But follow those numbers out to 2015 and the numbers begin to grow to improbable sizes.

The more likely prospect is for Apple to launch into yet another product category, in addition to the growth of its existing businesses. The possibilities are endless, but there is one new product that seems to be getting more attention than the others.

One thing is for sure: whatever is coming out of Apple's Cupertino R&D labs next is key to the company's continued explosive growth.

Article Link: To Beat the Law of Large Numbers, Apple Must Expand Its Product Line

[jlgolson]

tl;dr:

Apple can easily double its revenue over the next two years with its existing product lines, but to do it at that pace more than once is going to require entirely new products.

[Macman45]

Well, I guess the Apple television project would help...I'm sure we will see more new innovative products as well..The rumoured smaller "entry level" iPad still sounds a good idea to me...If only to bring Apples products to many less fortunate than ourselves.

[MasterHowl]

Inspiring stuff.

[keysofanxiety]

Good luck, Apple!

[ABernardoJr]

New Apple products... Sounds like a win-win situation for Apple and its consumers. I also imagine the rumored Apple TV set to be a potentially big part of this.

[firestarter]

But... can they afford to discard old product lines and markets while chasing new growth areas?

Yes, I'm talking Mac Pro.

[Spectrum Abuser]

It almost feels like APPL is a waiter/waitress balancing drinks on a servering tray and each $50,000,000,000 is another full glass added. Eventually you run out of room unless your an establishment that has cut-outs in the glasses to stack over a dozen on one tray.

[Macman45]

Originally Posted by firestarter

But... can they afford to discard old product lines and markets while chasing new growth areas?

Yes, I'm talking Mac Pro.

I agree, I have a relative newbie 17" Pro, so won't be updating this year, but it's still a mystery where they are going to take it...It needs a revamp for sure, but I'm not sure I would replace mine with another 17" unless they cut the weight...Maybe drop the optical and use a high capacity SSD...But then it begins to look a little like an MBA, which I must admit I use a lot more than my Pro these days.

Where do you think they should take the MBP next?

[jackc]

I don't think you need the golden theorem to explain the point, the writer got a little overzealous

[jlgolson]

Originally Posted by firestarter

But... can they afford to discard old product lines and markets while chasing new growth areas?

Yes, I'm talking Mac Pro.

From a shareholder perspective: yes.

As someone who has a Mac Pro and would love another one, this would bum me out, and I don't think Apple is going to kill off the Mac Pro -- but I can't say I would be terribly surprised.

However, wouldn't they have done it by now? Once Intel releases the next generation of chips, we'll see new Pros.

[NakedSnake]

Gives a whole new meaning to the "Big Brother" Superbowl commercial when Apple can theoretically now buy countries.

[snowmoon]

APPL doomers have been around for years, maybe some year they will be right, but it's not going to be in 2012.

[devilbond]

Interesting article, however, I'd propose that Apple do not need to earn a single dollar more than they are already earning.

[nagromme]

Hopefully they’ll focus first on having a passion for making great things--things that meet a need really well--rather than following the dictates of a mathematical model! The latter may be necessary to sustain maximum growth, but it’s not sufficient—and could even harm the philosophy that has caused all of Apple’s growth to date!

“The charts say we need to be in some new areas... what product lines can we add?” sounds like an approach worthy of many of Apple’s failed competitors...

Of course, as a user and not a stock owner, I don’t care whether Apple’s bottom line grows on the same curve forever. I just want them to keep making good stuff that’s so simple it seems obvious, yet can’t be duplicated!

[jlgolson]

Originally Posted by snowmoon

APPL doomers have been around for years, maybe some year they will be right, but it's not going to be in 2012.

I would also note that it's not exactly an Apple doomsday point to say the company can't keep doubling its revenue every two years more than one more time.

Growth will slow, or Apple will come out with more products to sell.

[bobringer]

"Apple is so big, it's running up against the law of large numbers."

Uh... what? It's running up against the law of large numbers?

Did this guy just completely miss their last quarterly report? What in the world is he talking about. The rest is just "blah, blah, blah" when you start with something that ridiculous.

If he started with "at some point, they should run up against the law of large numbers" I'd be right there with him.

But to say "It's running up against the law of large numbers" is not based in any reality at all.

[iSee]

Originally Posted by MacRumors

Apple is so big, it's running up against the law of large numbers.

Also known as the golden theorem, with a proof attributed to the 17th-century Swiss mathematician Jacob Bernoulli, the law states that a variable will revert to a mean over a large sample of results. In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger.

That's not what the law of large numbers suggests. Kind of sad that the New York Times is so badly misusing that term.

Apple's numbers are amazing.

[Macman45]

Originally Posted by jlgolson

From a shareholder perspective: yes.

As someone who has a Mac Pro and would love another one, this would bum me out, and I don't think Apple is going to kill off the Mac Pro -- but I can't say I would be terribly surprised.

However, wouldn't they have done it by now? Once Intel releases the next generation of chips, we'll see new Pros.

Or, kill it off in favour of a high end MBA? I love my Pro, but an MBA with a high capacity SSD, 8GB Ram and a much improved GPU would certainly tempt me. For now my Air isn't up to studio work, simply because of the SSD size...My pro does that job, I don't want to be looking over my shoulder at disk space in mid-session.

[snowmoon]

Originally Posted by jlgolson

I would also note that it's not exactly an Apple doomsday point to say the company can't keep doubling its revenue every two years more than one more time.

Growth will slow, or Apple will come out with more products to sell.

and/or penetration of their existing products will climb. Global markets are ripe for iOS growth.

[osx11]

Originally Posted by firestarter

But... can they afford to discard old product lines and markets while chasing new growth areas?

Yes, I'm talking Mac Pro.

While I am by no means an expert on professional computing needs, I see no reason for Apple to continue this product line.

As far as I know, no OSX/iOS app developer NEEDS a 12-core Mac Pro. That's the only part that concerns Apple, but I am willing to argue that those apps can be written on higher end quad-core iMacs. With mainstream (quad-core) processing becoming evermore powerful, the need for a Mac Pro diminishes.

I have a 2010 13" MBP, and the current 13" Macbook Air is 60% more powerful. Having said that, it is clear that performance is moving in the right direction, and it is moving rather quickly.

It's just a matter of time until we see 2 quad-core processors in the MBP and iMAC, at which point the processing power will generally far exceed the consumer's needs.

THOUGHT EXPERIMENT: Maybe Apple will discontinue the Mac Pro and will instead allow you to daisy-chain multiple Macs together, creating one powerful processing machine.

----------

Originally Posted by jlgolson

I would also note that it's not exactly an Apple doomsday point to say the company can't keep doubling its revenue every two years more than one more time.

Growth will slow, or Apple will come out with more products to sell.

Look at Microsoft (not that Apple will ever be like them) - a company that has seen very little stock growth in the past 15 years. They profit margin is relatively constant and they produce products that tens of millions of consumers purchase every year.

[DeltaRage]

"Also known as the golden theorem, with a proof attributed to the 17th-century Swiss mathematician Jacob Bernoulli, the law states that a variable will revert to a mean over a large sample of results. In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger."

Ugh. So wrong. So so wrong. It suggests nothing of the sort. In fact, it suggests nothing at all about Apple. He even has a paragraph about Bernoulli. Painful.

[drummingcraig]

Enter Apple TV.

Perhaps its Initial price point will prevent it from having the massive sales of the other iDevices, but it is opening the door for a whole new market share.

[osx11]

Originally Posted by Macman45

Or, kill it off in favour of a high end MBA? I love my Pro, but an MBA with a high capacity SSD, 8GB Ram and a much improved GPU would certainly tempt me. For now my Air isn't up to studio work, simply because of the SSD size...My pro does that job, I don't want to be looking over my shoulder at disk space in mid-session.

I think the Mac Pro's days are numbered - a process that started when thunderbolt was introduced. We are only now beginning to see the possibilities of high speed data transfers, and I think it will be exciting to see how Apple plans to incorporate this technology into their products.

[snowmoon]

Originally Posted by osx11

THOUGHT EXPERIMENT: Maybe Apple will discontinue the Mac Pro and will instead allow you to daisy-chain multiple Macs together, creating one powerful processing machine.

Short of absolute ram expansion, the iMac + thunderbolt ( RAID arrays, SSD, displays, PCI-e chassies for GPGPU's ) should service the vast majority of the Mac Pro market.