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Weighing the share of value created

Philip Elmer-Dewitt published a table from Piper Jaffray’s Gene Munster which has some interesting details. Munster has taken a four year “tech sector” view of value creation (and destruction) and tried to see if there is a bound on the value Apple can continue to capture. This “share of value” is one of many approaches to bounding an opportunity. You could consider “share of wallet” by measuring disposable income, or “share of eyeballs” by measuring screen time available or even “share of GDP”.

The attractive part of the share of value of industry is that we have an implicit way to see winners and losers, or the transfer of wealth from one group to another. I charted the data published as follows:

Seen in this context, Apple generated nearly as much value[1] as RIM, Nokia, Sony, Dell, HP and Microsoft destroyed. The rest of the sector generated $233 billion of value but if it were not for Apple, the tech sector would have declined by $168 billion.

As a result, Apple went from being 5.6% of the value of the sector to being nearly 17%. The argument goes that its share of value could still increase further even if the overall sector does not. At 30% of current total value, Apple would be valued above $1 trillion.

My observation is that the conservation of value exhibited in this data is not the entire story. What is gained by Apple should be more than what is lost by others. The disruption under way has had victims but the net value created should be more than what they lost. The iPhone and iPad should be competing with non-consumption, bringing new value into the sector from other sectors or from non-productive capital. Perhaps they are and the losses by the cohort arrayed above are incidental, but there is likely to be a blend of competition and new market growth.

Does the analysis satisfy?

Perhaps. It’s one more perspective into the puzzle. Growth rates, market sizes, technology improvements, brand and satisfaction analysis as well as jobs to be done are all offering perspective views. I would say there is consistency in the data but they should all be weighed with vigilance.

Notes:

  1. Market cap is the perceived net present value of all future cash flows discounted to the present for a publicly traded company and hence defines the value created by the firm. It’s measured by markets so there is room for error but it’s the best measure available and has historically been accurate over long periods.
  • graphex

    Horace, can you add a chart of each companies earnings over this same period? (Market cap is based on sentiment. Earnings are real.)

    • Baxboy42

      I think this is a great question, but doesn’t Apple have sentiment built into its price,too? P/e ratios are by nature dynamic with current/future info being (or attempted to be) factored into current price.

    • http://www.asymco.com Horace Dediu

      There was something like this done a while back: http://www.asymco.com/2011/09/13/growth-and-punishment/
      See also the posts linked from there.

  • gbonzo

    “What is gained by Apple should be more than what is lost by others.”

    The data shows exactly that. The tech sector added more than $200 billion of net value. Even if you only count Apple against the direct competitors RIMM, NOK and SNE, the net value gain is more than $150 billion.

  • Sebi

    I think Samsung benefits also from the Disruption caused by Apple.

  • DV Henkel-Wallace

    “The disruption under way has had victims but the net value created should be more than what they lost” 

    The way you use “disruption” (which I agree with — per Christiansen) your assertion  should rarely if ever be true by the way you measured it.   Look at tablets — Apple charges _less_ than other tablet vendors, and though they grew the tablet market enormously, they did so at the expense of (more expensive) PCs.  So the excess value of switching to Apple was largely realized by the customers and is not reflected in the in-industry comparison.

  • MOD

     ”the perceived net present value of all future cash flows discounted to the present”

    is infinite for a going-concern business. This is not the accurate definition of market cap.
    The definition of market capitalization is the price per share times the number of shares outstanding. The price per share is completely determined by the market, for publicly traded companies.

    • JDSweet

      “Discounted future cash flows” (aka NPV or net present value) is not infinite even for a going concern. Wikipedia can explain better than I can.

      I think Horace’s point was that the actual market cap – which is the definition you provide – could be *interpreted* as the market’s current perception of a company’s NPV

      • MOD

        A going concern means it will continue forever. If it continues forever it will always make money, even if a little bit. If you add up all the money it will make in the infinite future the amount is also infinite. The discount to the present does not change infinity.

        I read accounting textbooks, not wikipedia.

        The valuation of a (private) business is usually 10 times its annual net profit, not all future profit.

      • Tatil

        Then, read those books once again. Unless the money expected to be earned in the future years is growing faster than the discount rate, the present value becomes finite even if the “going concern” lives forever and the company makes “some” money every year. All you need are the tools you learn in middle school math to prove this… 

      • MOD

        Infinity is a subject taught in college math, not middle school math. Lucky for you I majored in math in college.

        Infinity divided by any number is still infinity.

        And this is confirmed by the accounting books. I just read this last month. Are you a CPA?

        Lets say the company earns $1/year, for infinite years. The result is $Infinity (“simple” infinity for math majors out there).

        Now divide $Infinity, by the Present Value factor, of your choosing. The result is still $Infinity.

      • gbonzo

        Try addind the numbers 1, 1/2, 1/4, 1/8, etc. together. The result approaches 2, not infinity. This is exactly the calculation when a company earns $1 each year and the discount rate is 50%. In reality the discount rates are lower, but the process still produces finite results.

        If the discount rate is 10%, you are adding numbers $1, $0.9, $0.81, etc. The sum of this infinite geometric series is 10, not infinity.

      • http://twitter.com/handleym99 Maynard Handley

        Sorry, MOD, but you are simply wrong. Tatil_S and gbonzo have explained the details. 

        Yes, we can make this as complicated as we like. If you throw uncertainty into the discount rate AND allow the range of uncertainties to approach zero, then strange and unexpected things can happen — but that’s not the issue here. 
        Likewise the difference between countable and non-countable infinities or between cardinals and ordinals are not relevant to the point at hand. 

        You are operating under the mathematics of Zeno, but we have made quite a bit of progress since then; and all this issue requires is the mathematics of the seventeenth century.

      • MOD

        If you add 1, 0.9, 0.81 your are adding a finite amount of numbers representing the future life of the company, then your results are correct.

        If you assume an infinite future company life (which is obviously erroneous), then you are dealing with infinity and I am correct.

        The present value factor of an annuity is either applied per year, or as a factor, since you are not going to manually count more than a few years.

        If you are not willing to manually count any more than a few years ahead, and you let the math take over, you obviously have math problem. (Because infinity divided by any present value factor is still infinity).

        This is not just a matter of mathematical reasoning, but also business reasoning. The issue is how far out do you project the life of a business.

        And by the way, if the business makes more than the discount rate (which in itself is a questionable measurement), and which any business should, or else shut down and put the money in a bank, then the result is infinity no matter how you count it.

        This is because you are adding 1, 1.01, 1.02, etc, (according to your calculations).

      • gbonzo

        I used spreadsheet to add those numbers 1, 0.9, 0.81, … together. So each number in the series is 10% smaller than the previous one.

        After adding 50 terms the sum is 9.95.

        After adding 100 terms the sum is 9.9997.

        After adding 200 terms the sum is 9.999999993.

        I already knew that the infinite series sums up at 10 exactly. I did not do this simple exercise to convince myself of the result. I did it to convince you.

        This infinite series adds up to 10, not to infinity.

      • http://www.asymco.com Horace Dediu

        An accountant and a financier and a business manager will have plenty to disagree about. Business management is full of contradictions on even the most basic of definitions. It is not axiomatic.

    • http://www.asymco.com Horace Dediu

      Market cap is price per share times shares outstanding but it’s also the value of the business since it can be purchased for that price. And the value of any business is the perceived present value of all future cash flows. Note that I used the word “perceived” NPV. The perception is what the market creates.

      • MOD

        I take issue with business school theory attributing the market knowledge and calculations which most of its participants don’t even understand, never mind try to follow. I daresay 80% of investors have no idea what NPV of (after-tax) cash flows means, and of the 20% who do understand it, not even 1% follow it.

        Most follow the crowd, (who are just as ignorant as they are), CNN type news, or what some analysts say.

        Presuming that the market will do the correct thing and value a business correctly is just as as dangerous as presuming that the market will value a business incorrectly.

        Appealing to textbook theory as an argument is as convincing and popular as interviewing a business professor on CNN and WSJ. As popular as Greenspan warning of “market exuberance” in the middle of a bubble.

        I remember during the housing bubble those who claimed that the houses were overpriced were hounded out of the discussion.

        As dangerous as some people here on Asymco who do not think critically for themselves but follow you because you are popular.

  • JohnQ

    MSFT at its peak had a mkt cap of almost $620 billion but its P/E was astronomical. Apple, even at a trillion mkt cap, would have only a P/E of 12x in 2015 if Piper Jaffray’s estimates are correct. Just some perspective since so many imbecils on TV compare to the mania of the late 90s

    • Mshipe

      A further consideration is that IBM’s market cap in 1963 would be equivalent to $1.35 trillion (inflation adjusted) today.

  • MattF

    But is the flow of money into shares really segregated ‘by sector’? In fact, there’s all sorts of weird constraints on the flow of capital into (and out of) the stock market. It’s certainly interesting that Apple’s market cap gain is, order-of-magnitude, equal to the sum of a set of other companies losses– but I think the big take-away point is that Apple grew during a period when many other companies shrank.

  • LTMP

    I’ve been wondering how AAPL’s growth will effect other companies share prices over the next few years.

    As AAPL’s earnings grow (I believe they will), either the P/E ratio will contract significantly again, or other companies valuations will decline.  This will happen due to the limited amount of cash available for investment in the US market.

    We saw the huge spike in AAPL’s share price leading up to the dividend announcement, which I take as confirmation of my theory.  The addition of a dividend allowed many new funds to buy into Apple.

    I believe that Apple’s earnings could easily quadruple over the next 4 years.  If they do so, Apple could literally suck much of the available cash out of the market.

    The only way that I can see Apple expanding the available cash is to broaden their market by offering their shares in foreign exchanges.  I don’t know if this is legal or not, but if it is, it might also allow them to use some of their foreign currency to offer dividends in other countries.

  • Martin Dunphy

    “The disruption under way has had victims but the net value created should be more than what they lost”

    You base this assumption on disruption competing with non-consumption but I have my doubts about net market value creation. What about digital cameras? Dedicated music players? DVD players (for IPad and apple tv)? Best Buy? Game Stop? media retail?

    Toni Ahonen’s Mobile + X = Mobile (a thesis on mobile convergence) would imply that there are serious market caps being destroyed here in almost every industry that mobile can displace. I think this thesis applies equally to the iPad, but extends the convergence in ways the IPhone could not.

    • http://www.asymco.com Horace Dediu

      I find the premise of Mobile + X = Mobile not credible. Twenty years ago Mobile was zero. Nearly the entire mobile industry is probably an order of magnitude greater than what it replaced (fixed telecom). The same can be said of PC-based computing relative to time-shared computing. The same, I think, will be said of mobile computing. The benefits of these vast expansions in value are manifested in increased global GDP, in increasing productivity and standards of living.