The headline in today’s Wall Street Journal, “Apple in Long Losing Streak, Bad run hits eight days, iPhone maker’s longest since 1998” illustrates the current state of the company’s stock. It wasn’t long ago that market pundits were touting Apple as the first trillion dollar market cap company and that the growth of Apple would continue on an upward trajectory in perpetuity. Unfortunately, the law of large numbers makes that reality extremely difficult to achieve.
In order for Apple or any company that reaches a certain size in revenues to continue to grow at the rate they have in the past, it becomes mathematically more and more difficult. Apple had revenues of $50.56 billion in the last quarter, an enviable figure for any company, however that represented a sequential shortfall from the previous year’s revenues.
In order to grow revenues at the rate of 10% from the previous year Apple would have had to add $5.8 billion in extra revenue. That’s the equivalent of adding the revenues for entire year from Adobe. Not an easy feat and one that Apple has been able to achieve in the past, but as the revenues get bigger the amount of change it takes to keep compounding at the historical rates of growth becomes increasingly more difficult.
As Warren Buffet wrote in his 1989 Chairman’s Letter:
We face another obstacle: In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor.
Personally, I think Apple has moved from a growth stock to a mature stock and the shareholder base is in the midst of changing from growth investors to value investors. I would look to the past transitions of Microsoft, Intel, Cisco, and Dell to get a sense of how this has played out before.
At some point in the life cycle of every high growth stock, there comes a time when the success of the past becomes an albatross for future growth.