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Analysts: Apple's growth next year to drop to half of what it could obtain during the recession

Apple is having difficulty meeting demand for the iPhone and the iPad. It is growing both businesses at more than 100% and they make up about 65% of revenues, and 71% of profits. The Mac business is also growing at 2x to 3x the PC industry.

Being supply constrained makes it therefore a great challenge to forecast future growth for the company. Supply issues and ramp rates are needful of an operational expertise few possess outside of the industry. But many take up this challenge, myself included. We put up our numbers every quarter and get scrutinized and challenged for our failures.

So it’s always exciting to see how others are looking at the big picture. Sadly, with the growth data being what it is, there seems to be a great deal of pessimism around the company’s prospects. The P/E ratio has remained at despondent levels for over two years, barely tracking with the P/E of the S&P 500 and not reflecting the company’s historic or current growth.

The logical explanation is that pricing reflects a consensus that growth will fall off a cliff. Indeed this can be confirmed. Bloomberg surveyed analysts and they say:

Apple’s sales may climb 54 percent to $100.3 billion this fiscal year, which ends in September, the average prediction of analysts surveyed by Bloomberg. Growth may slow to 18 percent the following year.

Fifty percent growth this year and 18 percent next year is indeed catastrophic. Consider the company’s recent history as shown in the following chart:

The company has been growing earnings around 70% a year since 2007 at least. The exception being 2009 when in the middle of the worst recession for a century the growth dropped to 34%.

I took the liberty of adding the estimates cited above to the chart (in orange) while putting forward my estimates for the same time frame.

I am, I believe, conservative in my estimates (for example, my estimates do not take into account any new product categories Apple may launch). But the prospect of 18% growth for the fiscal year beginning this October is quite hard to justify knowing what I know about the markets Apple competes in. As I’ve amply described in this blog, the mobile computing (aka post-PC) shift is underway and Apple is leading the charge. The prospect of billions of unserved customers beckons and Apple is crushed with demand.

But let’s not quibble about billions of desperately underserved consumers. The thing that sticks out from the chart is that analysts are forecasting growth about half of what Apple was able to achieve in 2009–a time when consumer spending practically stopped world-wide and there was talk of another depression.

Either they’re in agreement that we’re in for something resembling a global plague starting in six months or they believe Apple is singularly positioned to drop the ball.

I would love to hear some these scenarios defended because I see no evidence for either.

  • Toby

    I'm just going to assume that these analysts are on drugs or something. What I would like to know though, is what your own reasoning behind modeling a (not nearly as insane) slowdown of growth in 2012 is.

    • asymco

      It's mostly a decrease in iPhone average price. Several years ago I expected that price would start to erode as they reach into new markets. So far it has not happened. Like I said, I'm being conservative. I usually update the figures every quarter as the market evolves.

  • Andrew

    Following quote coming from George Colony of Forrester in a Bloomberg Article ("Apple’s Revenue May Grow 50% Through 2012 on Mobile Boom") today:
    “Remember, every two years they have to fill that store with new stuff,” he said of Apple’s retail outlet. “Without Steve Jobs as the CEO, I think it will be much harder for them to do that. That would be a massive, massive hit to the valuation.”

    The low valuation is reflecting this pessimism.

    • Joe_Winfield_IL

      “Remember, every two years they have to fill that store with new stuff”

      The beauty of phones is that they sell themselves every two years. Apple needn't even continue its leadership in innovation to grow its most profitable business. They simply need to tread water to continue to sell more iPhones. They can follow the "rising tide" to success. The rising tide valuation is a worst-case scenario, and totally unrealistic (even without SJ) given the company's log track record of innovation.

      The problem is that most analysts view Apple as a consumer products company rather than a solutions provider. Apple is an innovation laboratory, on par with Dupont and 3M. Nobody questions these companies' ability to constantly find new uses for everyday products and chemicals, yet Apple is constantly compared with Sony or Dell or some other formerly great computer/CE business. But innovation and design are core principles at Apple, much more so than the manufacturing and distribution that once made these faded companies great. How long does the success need to last before the naysayers stop calling the innovation a lucky guess?

      • http://twitter.com/alexcruise @alexcruise

        Very insightful. Apple's peers are not Sony and Dell, they're Google and… Hmm. Lemme get back to you. ;)

      • Hamranhansenhansen

        Google? Ha ha ha ha ha ha ha ha … no. Google is not Apple's peer. Google makes 96% of their revenue from a single product that they cribbed from another company and had to pay them damages in court. Not even close to Apple. Google throws me-too product after product up against the wall to see if it sticks. Google has no artists or designers and is deliberately anti-art, anti-design.

        Google has Apple envy, same as Microsoft. That is the closest they get.

      • qrj

        You're pointing at an advertising company and then complaining that it makes their revenue from advertising. I don't see how acquiring Adsense equates to damages in court. Google doesn't do product, it does platforms, nonetheless the companies compete.

        This website is called asymco, it refers to asymmetry. You're looking for symmetry.

      • barryotoole

        LOL. Goes an old Chinese saying: If you throw enough mud at a wall, some will stick. This is the business model of the ever-beta company, Google.

      • ampressman

        DuPont and 3M trade at P/E ratios of about 16, even less than Apple, so I'm not sure the market recognizes what you're saying.

      • Joe_Winfield_IL

        DuPont and 3M are not growth companies, and Apple is in the middle of an explosive growth phase. My point wasn't to compare financial statistics, it was in perception. DuPont and 3M would trade at significantly lower P/E multiples if not for their abilities to innovate. A company growing earnings at 70% annually should garner MUCH higher multiples than 3M and DuPont. For reference, 3M has grown earnings by 6% total between 2006 and 2010, while DuPont has managed to shink earnings by 4% over the same time frame. Meanwhile, Apple earnings are up 605% over this window.

        If one company has grown earnings by 600% while the other two have flatlined, and it is expected to CONTINUE this growth, it should be rewarded with a huge premium, not a minor one. Ex cash, these three companies are basically all trading at the same price, between 14 and 15.5 times.

      • asymco

        That's the whole point. Apple is priced like a value company but growing like a growth company.

    • Jons

      Every employee at every company has both strengths and weaknesses. This includes Steve Jobs whose talents are indisputable and have put him on a pedestal that few if any can approach. Some of his weaknesses are also apparent but at least up to now they've have been dwarfed by his exceptional abilities. The thing is, with time, the strengths become less significant while the weaknesses have a tendency to stick around stubbornly. The innovative and perfectionist culture at Apple will continue long after Jobs leaves Apple. The question is whether someone else at the helm might take the ball further at this point.

      I'm going to dare ask the question: Is Jobs more of a liability than an asset at Apple, today and in the future?

      • barryotoole

        You do raise an interesting point. However, without the tenaciousness that SJ exhibited, there would have been no iTunes Store, DRM free music, or a carrier-independent phone. Some criticize this as arrogance and give the latest example of a tightly controlled App Store.

        My point is that a trait is a double-edged sword; a weakness could also be an asset, depending on the circumstances. It's like the difference between a mutiny and revolution, depending on whether the movement succeeds.

      • jaquin

        Rather than a liability, its possible the Analyst's are pricing in what they think the company will be worth when Steve Jobs dies. I am not trying to be ghoulish, but its worth asking what plans Apple has in place to find a successor to SJ, (I think they already have someone in mind) but it would seem that the pedestal that SJ has been raised to, will automatically make any successor look "short" by comparison, regardless of how well prepared they may be to lead, or the company to continue to make good products that make customers happy.

      • capablanca

        Yes. Well stated.

        Like Henry Ford, Nikolai Tesla, or Andrew Carnegie, Jobs is a genius with great drive. His vision, imagination, design judgment, and persistence are unlikely to be matched in any one successor. But imagine how much the many talented people at Apple have learned from him. He is Issac Newton's proverbial giant, and as such the people of Apple will stand on his shoulders for many years to come.

        -capablanca

        His weaknesses are not insignificant. I don't say they outweigh his strengths, but I do argue that Apple will not be any less great as a result of his retirement.

  • http://ximagin.co/thecw The CW

    Clearly they understand what is patently obvious… "Motorola is going to eat Apple's lunch!"… or maybe it's "Samsung is going to eat Apple's lunch!"… or lately it's been "Amazon is going to eat Apple's lunch!"

    Or some combination of x, y and z where x is a hardware company, y is google, and z is amazon.

    I think your prediction is bankable.

    • butolic

      Note how x, y and z are never Microsoft.

    • asymco

      > I think your prediction is bankable.

      That may be, but those whose opinions I cite are laughing all the way to the bank with their paychecks.

      • JonathanU

        Horace – have you had any interest from any of the equity research houses in employing you? I would imagine you would be a pretty good candidate given your previous track record…

      • asymco

        Haven't heard anything.

      • Childermass

        They are paid to be lap dogs. I don't think it would suit you, sir!

        Stay independent, don't pimp yourself like the whores of Wall Street.

      • barryotoole

        Horace, I think you should continue doing what you are doing. I see your name being mentioned with respect and admiration across blogs and even in some MSM.

        As Malcolm Forbes said, "Do what you love, and money will follow".

  • http://twitter.com/PaulMaxime @PaulMaxime

    I agree with Andrew, but I also think that analysts don't want to look foolish. Maybe I can give them the benefit of the doubt and they're just being prudent? I think there's a lot of peer pressure in this community and you don't really want to take the risk of standing out too much. If you do, and you are wrong, it looks way worse than if you are in the ballpark with everyone else.

    • asymco

      They are most certainly standing out by being wrong, consistently and vis-a-vis amateurs.

  • Nicu

    I totally agree with your analysis.

    I have been saying this for some time now, and when PED at tech.fortune.cnn.com republished my P/E and PEG study in August, most commenters jumped up that past performance does not predict future evolution. I was just arguing that $240 was too low !

    Recently, I posted some estimated of present value of Apple's future earnings and the conclusion is the same : AAPL at $350 today is too low ! http://www.traderhood.com/2011/01/21/aapl-intrinshttp://www.traderhood.com/2011/01/21/aapl-intrinshttp://www.traderhood.com/2011/01/22/another-take

  • famousringo

    I'm no financial whiz, but I can only think of two explanations for this kind of thought:

    1. Apple has been growing at such a break-neck pace that they simply must stumble at some point. This is just a cynical, gut feeling that no company can keep knocking it out of the park forever, and doesn't really add up when you look at how much growth potential Apple has in nearly every market they're involved in.

    2. They're deliberately trying to depress expectations to manipulate the stock price. Surely nobody on Wall Street would engage in such dubious behavior!

    But like I said, I'm no financial oracle. I'm sure these analysts are taking a clever and nuanced look at Apple's position that a layperson like me could never understand. Yep.

    • Splashman

      Yep, I'm an ignorant layman as well.

      I can't help but think of Steve's "other company": Pixar. A company with an unbroken string of box-office (and critical) successes which no conventional studio has been able to match. A company who has earned a reputation for not chasing the easy money, but innovating and taking chances (a movie about a rat chef?). A company which has nurtured a deep bench of talent, and is well-situated to maintain its dominance.

      Gee, that sounds familiar. But Steve's success is just a fluke. He's bound to step off a cliff any day now. Yep.

      • Hamranhansenhansen

        Yeah, they don't get that the success is not a fluke. There is an actual methodology of innovation, user-centric focus, super high quality control, and commitment and follow-through that is resulting in successful products that become popular simply because they are really, really good. People can't wait to tell their friends to get one and get in on the fun, the enhanced productivity, the ease of use, the next generation focus, or all of the above.

        At Pixar, they make a prototype of the whole movie using sketches and animator voices and they don't even start making the actual movie until the sketch makes grown men cry. They never waste a production minute on something that is not working. That is totally backwards from the typical workflow of shoot thousands of feet of film and pray there is a movie in there when you getnto the cutting room. If you are used to the fingers crossed workflow, you think good movies come from rolling the dice, not from simply continuing to work until you have made a good movie, every single time. Then you not only put out only good movies, you become known for putting out only good movies.

        Also, both Apple and Pixar innovate not just in product, but in tools. At Pixar they did Renderman, at Apple, Unibody construction. They can make unique things because they made unique tools.

        Plus, Apple has been recovering from 10 years of mismanagement, after which came 15 years of what everybody agrees has been great management (CEO of the decade). We should expect the sales and stock to be adjusting upward.

      • http://twitter.com/PaulMaxime @PaulMaxime

        Pixar point extremely well taken. I got to go see a screening at Pixar, and after the film we had a Q & A. I asked them how many ideas they throw out for each movie that we see. I assumed it was many. The surprising answer: NONE. The answer was that we keep working on an idea until it works. Thus you get movies like Ratatouille and Up, that nobody would have predicted.

      • Tatil

        Actually, in one radio interview, they claimed that all of the general ideas for the movies until "Up" (I think) was done over a dinner when they were first getting into the movie business. I don't know how many they have thrown away from the list on that napkin, but that sounds like a great business dinner.

    • Laughing_Boy48

      I think number 2 hits the nail on the head. Wall Street or hedge funds are really trying to keep Apple's shares depressed to constantly churn the stock. I don't believe Apple will ever get up to $400 because there'll always be some fabricated reasons for it not to. Apple is so far from its median target price it isn't funny, despite overwhelming demand for the iPad 2 and iPhone. I don't understand this at all. It almost appears as though nobody seems to quite understand Apple's current or future value or the stock is being manipulated very heavily. I find it difficult to believe that potential investors are not interested in buying this stock now with it having such high target prices, so Apple's share price continues to languish.

      • Joe_Winfield_IL

        It will get to $400 this year, and barring something unforeseen it will be at $500 by the end of next year. The company will be snapped up by every "value" fund manager in the business if the share price doesn't materially improve after the next quarterly earnings. The same share price, put against constantly increasing earnings and cash position, results in much lower multiples.

        AAPL needs to move up approximately $10 each quarter, just to account for the increase in cash. By this time next year, the company will have over $100 Billion in liquid assets, unless they start returning the money to shareholders. Either way, when combined with their growth, the stock will resume its ascendancy.

  • butolic

    The takeaway from this – is BUY AAPL.

    I don't think the PE ratio particularly low though, more that companies such as Salesforce, Netflix and Amazon are ridiculously high.

    • http://notesark.com iphoned

      How is this FY PE of 13 or so (less ex-cash) on a current-70% grower not low?

      • Charel

        I have read somewhere that for the price of the Appl stock to rise by 10% an investment of $34 billion is needed. Although at the scale of the total market it is not much, for a single stock it is a huge amount.
        I think the market needs more than hope to move the price.

      • butolic

        Charel – That's not correct. Money flows and stock prices are different things.

        One fat fingered trade can cause a stock to plummet, even though the amounts traded may be small.

      • butolic

        I don't think you should be looking at the PE ex-cash. But that's because I think Apple's cash mountain is too large, and that they could put it to better use.

        I'm long on AAPL, so clearly I don't think the PE ratio is too low, just that I wouldn't describe it as "despondent".

    • Joe_Winfield_IL

      I agree that the other growth stocks have gotten out of hand. The same can be said for many private tech firms and their valuations. I'm perfectly content with AAPL's price today. There is almost no downside at this level, and plenty of room to move up in an orderly fashion over the coming quarters.

      AAPL PE is not despondent, but it is still very low for a company growing at 70% on a "sure thing" series of products. They can't get squeezed out of their own products the way that the component makers can, yet many chip and sensor companies that supply iDevices trade at much higher multiples than AAPL. Their price trails pretty much every other mobile tech company, and is only marginally higher than many consumer staples like P&G, McDonalds, and Kellogg.

  • Hap

    One might easily question Apple's capacity to constantly come up with new stuff, with or without Steve. I am more curious, though, about the Apple ecosystem's potential growth in non-hardware, recurrent (in a sense passive) income. MobileMe subscriptions (though rumored soon to be offered free), ad revenue, Apple TV rental revenue, as examples. What else could establish "perpetual motion" profit centers? (Piddling as the current return might be, I haven't forgotten the income on the existing cash horde. Could that growing principal even become a diversifying and stabilizing factor in earnings?)

    • Hamranhansenhansen

      Their main product is OS X. They did OS X in a PC, server, phone, music player, tablet, and set-top. They can still do all the other devices. I see a crashed Windows at a bank machine or ticket vendor once a week. The various hardware interfaces of these machines makes them terrible to manage and upgrade and create UI for also. Cars and home automation are other areas. There is a shortage of reliability, design, ease of use everywhere there are computers.

    • Fred

      The core competency is definitely software, and to some extent hardware. Apple has always done well by walking into markets where there is a significant software component but the focus has been heavily on hardware. The reason is they can deliver a ton more software value on top of a nice hardware offering that is simply missing in the competitors product. Competitors then scramble to catch up, to find that Apple has a 25 year software lead on them. (Probably only 10 of it is leveragable. Engineers leave. Software is deprecated.) MP3 players and phones are obvious example. I think tablets are too, because the emphasis was always what is the right hardware design to make Windows (the software) work well, where as the focus should have been what is the right software design to make the tablet form factor work well.

      Similar disruptive opportunities due to under attention to software exist in home audio/video, big medicine IT, and automobiles. Of these, big medicine seems unlikely to attract Apples interest due to FDA regulation and lack of consumer focus. Automobiles also has regulation, and some core engineering competencies missing (internal combustion engines), but perhaps the advent of electric vehicles will be closer to Apple's core competency. I don't know how much extra value a user is likely to ascribe to a car due to software, though. Perhaps if the cars drive themselves?

      Home audio / video is a gimme. Apple has one product there already.

      Are there others?

  • BobShaw

    Every product segment goes through a short cycle of innovation followed by a long cycle of commoditization. In the innovation phase, companies that introduce innovative products are very well rewarded by the market as the market can absorb those innovations. The opposite is more or less the case in the commoditization phase and thus the competition moves towards price rather than innovation in this phase. We are at the transition point from innovation to commoditization cycle in smart phone and will be so also with tablets in a year or so down the line. Apple's strength lies in innovation and it would need to find some new product segment e.g. Apple TV etc. where it can compete effectively and maintain its growth rate.

    • SVE

      "it would need to find some new product segment e.g. Apple TV"

      That's some new product segment to enter. I know I just paid $3.5K for some big TV stuff. I can only imagine what would happen to AAPL finances if in the future all the households decided to shift their next big screen entertainment purchases over to Apple.

  • chano

    There is little chance that Apple will run out of ideas for future disruptive entries into sectors that won't see them coming. I believe this because the loose roadmap implied by Jobs' 2001 'Digital Hub' presentation specified the easily spotted early fronts of the intended assault and omitted mention of any of the longer term opportunities.
    So far Apple has moved into the logical first points of attack in a double-whammy manner. First iPod and ripping CDs and only then iTMS and an assault of the music industry. TV and Movie execs have wisely learned to be careful with licensing their family jewels but it is only a matter of time. The same with other media empires like newspapers and magazines. For them, there is nowhere to hide as the guys at Monday Note have been spelling out for some time now. Last gasps of the Dinosaurs of print. What replaces them will be interesting indeed.
    Which brings me to the future. There are other industries galore which are in need of disruption. I won't spell them out because you will only be shocked and outraged. But think on it guys. Apple looks for markets where there are established players who don't know how to milk a (cash) cow. The reason that I believe there is a time to every purpose (to coin a phrase) is that you cannot venture into some sectors until you are ready in terms of earned credibility and you have a hefty warchest.
    I don't say that I am right but there are so many sectors that Apple could tackle in time. Electronics sectors in the field of medicine, aerospace, and even the humble home automation market on a much lower scale. the first two are very high value industries with vast profit potential. The last is already filling up with largish players who don't have a clue about the potential within their grasp.
    The world is rich in opportunity. Sometimes they are so obvious, right in front of our eyes, we just don't see them.
    Jobs and Forstall and others in Apple have learned not only to look, but to SEE.
    That's why Apple has been walking on water, while competitors only tread water, at best, or drown in their own accumulated complacency.
    More than 10 years ago, Jobs spelled out the whole strategy to the world, and that includes its competitors. Clearly they were all asleep, inebiated by their short-term successes before the heavily hinted tidal wave of disruption arrived.
    You will recall what the established phone makers said about Apple's entry into the field……

  • davel

    Horace,

    I agree with your sentiments. As others have noted above, and you as well in previous musings, Apple is hated by the financial analysts for one reason or other. The old saw of the music needs to stop at some point and the exponential growth cannot last forever is all true.

    The problem is that Apple for the most part is participating in young growing markets and it has a minority position in many of its growth markets.

    The recent introduction of the iPad2 while not revolutionary is enough and better than its competition. This leads me to believe that Apple will continue to grow at a rapid rate and the professionals once again have it wrong.

  • William

    Fundamental analysis, long term (5-10 year) discounted cash flow methods, and strategic models are the basis for valuations and value investing. Yet the disruption of fast changing technology sectors and companies makes it difficult to use these valuation tools.

    It's why Warren Buffet can't figure out how to value Apple. See http://www.huffingtonpost.com/2011/03/21/warren-b

    Technical analysis combined with fundamentals are more applicable for tech companies, yet could miss long term gains.

    Valuing tech is tough.

  • SVE

    No one is yet modeling the fact that the possible market for Apple is now expanded beyond the "First World" and into the larger Developing World. Think market size of 5B versus historic 1B people.

  • Kristian

    Horace. You didn't believe it when I said that $1000 is nothing ;) I won't happen that slow that these guys for the first time are predicting in the right direction…

  • Kristian

    I won't = It won't

  • http://twitter.com/dtellom @dtellom

    Horace, there's a bit of mixed/confused metrics in the chart and the vague implication in the title: your blue bars are correctly labeled EPS growth, but the analyst consensus figures cited and in orange are for sales (revenue) growth. For FY09 revenue growth did dip to 14% while EPS growth remained brisk at 34%, as you mention.

    Historically Apple has been judicious in its explosive expansion, always keeping operational costs growth well below revenue growth, and slowing growth of these expenses (though never cutting or downsizing) whenever revenue growth slowed down to more mundane levels (other than the recession figure mentioned above, FY07 saw "merely" 27% rev growth while opex growth was kept at 19%) all while increasing gross margins. Apple is very consistent in this, with lower opex growth than revenue growth in every single fiscal year after 2003, and not just barely below but a disciplined 60% to 70% of the revenue growth pace, with the FY09 exception which kept opex growth at a steady and reassuring 12% (still below the aforementioned 14% revenue growth) while every "successful" company in the world was restructuring (slashing jobs and killing off whole divisions) to prop up EPS or prevent loses.

    Of course this, and the accelerating gross margins, has meant EPS growth has consistently been much higher than revenue growth, more than twice as high on average over the last five years (much less in last few quarters but still significantly higher).

    In light of all this, what's most striking to me about these 2012 growth estimates from paid analysts is that they have EPS growth even lower (than revenue growth) currently at 15% from 2011. In other words, to be consistent in your chart and use comparable EPS growth metrics, the contrast in height between the last blue and last orange bar would be even starker. Surely it's not accurate to state their sales growth estimates are at half the one achieved during the recession, since that was in fact lower at 14% (I notice you do not mention sales nor EPS in this statement, so it's just vague there, but the chart is indeed labeled as EPS growth which is inaccurate). What would be accurate though is to say that the consensus EPS growth estimate for FY2012 is well below half the one achieved in FY09.

    What I'm saying is, you're being generous to paid analyst by mixing up the two different growth metrics.

    • capablanca

      Good points, Daniel.

      The phenomenon you point out here is yet another example of a benefit of the Apple culture. By maintaining their relentless focus and discipline, costs are closely associated with opportunities. This contributes to efficiency. Moreover, while there are limits to how fast a company can efficiently grow costs, the limits to effective growth of results are less constrained. Apple is masterful in allocating resources to the best opportunities and avoiding allocating resources to problems.

      We see this in the ratio of R&D expense to revenue. We see it in how fast Apple is willing to grow its retail store count. And we recently saw it in the elimination of the server product line.

      -capablanca

    • asymco

      Valid points. I should have been more clear. My growth scorecard shows the correlation between sales growth and profit growth:
      http://www.asymco.com/2011/01/20/apples-growth-sc

      Earnings have typically grown faster than Net sales.

  • asymco

    Your argument reduces to markets requiring pricing below book value for large enough market caps. That itself implies that once a company becomes profitable enough owners can only benefit by taking it private.

    It's an intriguing thesis.

    • Ian Ollmann

      Mechanistically, we need only suppose that few investors would rationally expose themselves to more than x% portfolio holdings in any one stock, and we immediately have set a market cap cap on any company at x% of the total stock market valuation. Today, the total stock market valuation is under 50 trillion, and Aapl is at 0.3 trillion. Given two years of 60% growth, we are getting over x=1% by the 2012 timeframe.

      I don't know what the right cap for x is, but i think the SEC may have set a few rules about fund diversification, and not all funds will be allowed to invest in AAPL due to market sector targeting.

      • Ian Ollmann

        We may be seeing a similar effect on XOM, at 13.3 P/E (9.9 forward), with what can only be imagined to be a good time for healthy energy profits going forward with peak oil likely and inelastic demand.

        @r00tabega (below)
        Yes, that would deplete the company of a corresponding amount of value and allow the market cap to sink. With enough earnings though, it seems you'd have to start borrowing to make that strategy continue to work. That seems wasteful.

        However, if you are perennially undervalued, it seems then that there is reduced risk that the company will go down in price, so it might be possible to attract buyers at a higher price despite the portfolio risk, especially if there was a dividend. (You wouldn't invest here based on valuation alone because the stock can't go up.) It would be a case where the dividend should actually theoretically affect the stock price, whereas normally whether the company reinvested earnings or the investor does would be equivalent, all reinvestment returns being equal.

        Realistically, I'm sure there is no actual market cap cap — greed is endemic — but there could easily be some resistance at some level.

    • r00tabega

      Isn't this kind of hypothesis the reason companies institute buy-back programs (which Apple has not yet done)?

      If you're trading at a small multiple of P/E or PEG, then why not buy your stock on the cheap, especially if you are highly confident it will continue to rise?

      Aside from the moral hazard issues, what's the real downside to buy-backs?

  • Childermass

    Each quarter the 'amateur' analysts beat their professional (and I use the word lightly) counterparts in the Apple guessing game.

    I believe the professionals have four major problems.

    1 There can be no gain for the interest groups they are serving in over-estimating Apple's performance. A few are buy-and-hold, but most are stock churners and shorters and they need the sudden changes in price that slaughtering estimates and negative rumors bring.

    2 They are mostly tech analysts and, as has been pointed out above – particularly Joe Winfield – they cannot grasp the realities of Apple's business model. They are not dazzled so much as looking the wrong way. They are used to spec-led narrowly-focussed marketing, not genuinely innovative desirable consumer products.

    3 As William says above, the normal techniques for assessing value in a stock simply do not apply to a business this disruptive, innovative and huge. 70% growth rates cannot go on forever, particularly in a business of this size, but they have already gone on longer than most thought possible, so now the analysts are in uncharted waters.

    4 Most professional analysis is not bottom-up rigor but a black art of comparisons and convergence. Apple truly has no peers at the moment. So they are not only in uncharted water but someone just stole their compass!

    The amateurs (HD at the head) think for themselves, assume nothing, recognise innovation for what it is and, knowing disruption means new paradigms, are prepared to take risks.

  • Prazan

    The problem with being Cassandra is being right but not being believed. When trying to see around the curve, yours is the first opinion I listen to. Invariably, you're right.

  • Ian Ollmann

    While I agree with you for the most part, Horace, I expect what we are seeing is some assertion that the law of large numbers is going to hit home at some point. In 2009, Apple was not a dominant player by marketshare in any segment but iPod. We've seen where that has gone. Apple is now dominant it both iPod and tablet. To grow at 60%+ annually in those areas the market has to also grow at 60%+. it's not going to happen in iPod. Tablet, we'll see. It is unlikely Apple will be so fortunate as to see 60%+ growth in Macintosh. Apart from phone, there aren't many other large enough profit centers for Apple. So to believe this, we have to believe in continued oversized growth (to compensate for other areas that we know aren't going to hit 60%) in some combination of phone marketshare and market size, and the YoY continued growth in tablet market size, and no destructive margin reductions, perhaps because of supply chain disruptions.

    It easily could happen. The smartphone market has surely got a few more years of growth yet, though as you point out we are already seeing signs of saturation in EU/US. It may slow. Tablet is anyone's guess, and last year everyone's guess was dead wrong. Do we believe there is enough growth in tablet to compensate for a smartphone slowdown too? Will Apple escape the earthquake unscathed? Are we banking on Apple creating a new $10B market by then?

    In the end, there are only so many wallets to go around. At some point, you've picked them all and the party ends, or at least hits steady state. In short, if it can't go on forever, it won't. It will end at some point. I hope it is after 2012. In the mean time, I fully expect the market to price the stock in "I'll believe it when I see it" mode. Don't expect it to prognosticate with a company few understand.

    • asymco

      There is such a thing as saturation, and the iPad shows where that level is for that product category. But for phones and tablets, the numbers Apple is now shipping are dwarfed by the potential. The ITU data implies 500 million mobile computers addressable in the next two years and a billion more two years later. Surely not all will be Apple's to gain but just maintaining current share would imply >100% growth for those products.

    • davel

      To Follow up on what Horace said, the iPad is a new category. Apple has priced these as equivalent to a laptop or high end netbook.

      There is definitely room to grow for the market.

  • http://franksting.net.au Gavin Costello

    Dear Horace, most analysts are risk averse. When they see big numbers, they run. That's why its a breath of fresh to read your views. They may be right. But I'm convinced they will forget they ever said it when they ar eproved wrong again. and again. and again

  • Iphoned

    It is a provocative title, but yes, this could very well happen. Apples’s earnings are disproportionnally dependent on iPhones high margins now, much more so the during the great recession. Should iPhone prices need to be reduced sharply due to competitive pressures, earnings could actually decline for Apole in that year. I am sure the probability of this happening within the next two years is non-trivial.

  • Developer

    None of these charts mean a damn because nobody accounts for growth in the money supply, aka inflation. The money supply is growing faster than the economy, which means we are in another depression. Doesn’t mean apple can’t be successful but it produces wonky numbers because you’re denominating in a depreciating currency. Failure to account for that would lead one to claim Zimbabwe had the most valuable company in the world a few years ago.

    But it isn’t popular among Americans to be honest about economic reality because it would mean the party is over. With Europe imploding country by country- portugals at bat now- we should be aware that america’s implosion isn’t too far off.

    I think apple will survive this- maybe that’s why they have the huge war chest, but better to put it in real assets than cash.

    Such an implosion, however, would be the cliff the analysts are expecting.

    Horace talks about them laughing all the way to the bank- it us not because they are smarter than the amatures, it’s because they know how the fame is rigged and are profiting from it.

    Read Economics in one lesson by Henry Hazlitt, or The Creature from Jekyll Island or and Mises or Rothbard. Economics is the physics if the financial world, ignore it at your own peril!

    • davel

      Economics is not physics. Physics does not have a huge emotional component to its equations.

    • http://twitter.com/Accent_Sweden @Accent_Sweden

      Ah, the great rightwing myth/wish that Europe is imploding. Sorry, but no it is not. Europe in general is in rough waters but not on the verge of collapse. Nor is the US. That's just wishful thinking by those of a particular ideology who need it to happen for their pipe dream not to be revealed for what it is. Like the neocons willing the US into a weekend war in Iraq and the teabaggers desperately needing Obama to not be born in the US to justify their hate. It's all just what their ideologies say have to be the logical result so they wish it were so. Otherwise, they have no proof for their ideology (I know, ideologies rarely have anything to do with rationality since they rarely stay put as frameworks of explanation into to how things work but rather morph into religious belief systems, but I had to write it anyway). Europe is having economic problems, some countries are having severe economic problems, but the worst are all smallish economies. Germany isn't going anywhere. Neither is France. Sweden has never seen the levels of growth it is having. Ever. Finland went through an even worse recession in the 90s after the fall of the Soviet Union. Italy has always been a mess politically but its ecomony isn't collapsing now either. The UK is hurting but they are doing what they have to to deal with. The cuts are painful but they survived Thatcher's heavy hatchet and even prospered after her and they will again. After 15 years of prosperity, Ireland has simply returned to the state it was in for the previous 1000 years, ableit with much nicer homes, more cars and no horses roaming the residential areas. The tiger's just resting until once again fed by corporate tax breaks. So enough of the Europe is burning boogieman and the collapse of the US economy baloney. We are still a long way from either. Such claims are simply narratives needed by a current political ideology (I suggest we call it Paulonian for Ron and son though others also want it so to be true) to win an election or two. The proof will be in if we are still buying iPads and iPhones in two year's time rather than scavenging for food. If I'm wrong I'll gladly eat crow (and will probably have to). How many think the fearmongerers will revisit their error in two years? Now back to the real discussion.

  • Westechm

    Anybody can make a prediction that will come true as long as you don't specify when. I predict that the will be a monster quake in LA. Sometime.

    There is no doubt that Apple's growth will slow down. It can't go on at current rates forever. Most people don't understand why they are so successful. Indeed, most people who think they understand business don't have a clue. Thet expect Apple to stub their toe soon, because they believe that it's done with smoke and mirrors, or their products are fads and insubstantial. These people want to be first to predict it's doom.

    I don't see a substantial slow down for at least two years. Before that happens the doom Sayers will capitulate and jump on the train…too late. The stock will grow at an accelerated rate to levels not supported by their business. That will be the time to sell.

    BTW, I am writing this on my iPad while on the Acela out of Boston. The train has wifi. Perhaps Apple will come up with a universal access that by passes the carriers. If not Apple, someone will. It's inevitable. Satellite?

    There I go, making a prediction without specifying when. OK, in my lifetime. I am 85 so that date can't be too far away.

  • http://flyingnorth.com Turner

    Apple is simply making and improving the "new washing machine" of its time. Their just getting started. Will they flub one? More than likely, but as their mix increases, the effect of one products less than steller performance will be minimized. It's a good stock ride for the near future, which is (insert your guess). Two years would be fine with me….

  • Citizen of the world

    hey Asymco,
    instead of finding fault with the world who disagree with or criticize Apple, why don't you do some useful work with all the talent that you have. Half of your articles are simply criticizing and mocking Apple competitors. Mostly linkbait articles. World has enough problems as it is. We all get it, Apple is unstoppable for next 5 years, as Microsoft withers away and possibly Google as well. But there is more to life than that. Sheesh.
    And you are now trying to predict the future yourself. What if there is a recession, sure Apple will drop, what if richter 10 strikes US or foxonn factory in China, will that affect Apple or not?
    Apple has won, now be large hearted and move on, don't whine like those pathetic Apple fanbois of which M G Siegler is a prime example. Don't harp again and again on the same bullshit.

    • asymco

      But Apple has not won. At least not by the measure of those who do try to predict the future. The whole point of the post is that Apple is considered by the vast majority of those who vote with their money to be a loser.

  • PatrickG

    Nice comparison Horace. I wonder if the analysts cited are also distracted by market factors and are failing to watch as Steve Jobs builds a phenomenally strong management team. That fact that Apple remains one of the "flattest" organizations for it's market value or impact on personal technology, has to factor in to this at some level. Hierarchical cultures have proven toxic to many organisations, resulting in several spectacular corporate wash-outs (at least where the US federal government hasn't stepped in to shore up those cultures). Based on what Steve Jobs has stated publicly over the last few years, his interest seems to be in building Apple into a higher functioning organization with strong development DNA – in short the best legacy he can create. Microsoft in contrast has a very toxic corporate culture, where internal teams are destructively competitive. Most of my acquaintances within are farming their expertise as rapidly as they dare in order to escape before things get critical. Redmond's mass is the only thing maintaining it right now, whereas Apple's dynamic fluid and capable of launching things like the post-PDC era, for example. I don't want to draw unwarranted comparisons to a Kuhnian "scientific revolution", but Apple seems to be built to do just that in technology

  • Simon Hibbs

    I think this is because the analysts (and Apple's competitors) are obsessed with hardware and consistently fail to take into account the value of software. In the iPod days it was iTunes that was the magic software ingerdient. Nowadays the OS is more important.

    Android has almost cought up on phones, but is still held back from poor media players and an apalling marketplace. Meanwhile Honeycomb is comparable to the iPad OS of a year ago at best, and arguably fails to stand up to that comparrison. Meanwhile Blackberry's developer support and app strategy is a mess.

    Apple still has at least a 2 year lead on the software front, and show no signs of allowing that lead to narrow. How many years before Android devices run apps equivalent to Garageband and iMovie?

    Analysts routinely predicted the fall of Apple's iPod empire because software can't be that hard and hardware competition would catch up some time soon. It didn't happen then, and it won't happen now.