How Apple Is Running Up Against The Law Of Large Numbers Know As The Golden Theorem


Apple is currently the largest company based on market capitalization. They took a lead over Exxon Mobile. Apple became the 11th company to reach the top spot since 1926 according to S&P senior index analyst Howard Silverblatt. Apple’s first quarter earnings was over $13 billion and it accounted for over 6% of all earnings in the S & P 500. For the quarter ending December 31, Apple reported sales of 37.04 million iPhones and 15.43 million iPads, which led to a total of $46.33 billion. The problem is that Apple is now so big that they are running up against the law of large numbers known as the golden theorem points out The New York Times.

Designed by 17-century Swiss mathematician Jacob Bernoulli, the golden theorem states that a variable will revert to a mean over a large sample of results. In Apple’s case, it means that the high earnings growth and a rapid rise in share price will alow as they become even larger.

Even if Apple’s share price grew 20% per year for the next decade, their current $500 billion market cap would be over $3 trillion in 2022. This is bigger than the 2011 GDP of France or Brazil. To increase their revenue by 20%, Apple has to generate sales of over $9 billion in the next fourth quarter.

Evercore Partners analyst Robert Cihra said that the law of large numbers being applied to Apple has been a concern over the few years. However Apple has actually accelerated revenue growth. “I don’t know that can continue indefinitely. If you extrapolate far enough out into the future, to sustain that growth Apple would have to sell an iPhone to every man, woman, child, animal and rock on the planet,” said Cihra.

“The valuation on Apple stock right now is unjustifiably low,” added Cihra. “If it weren’t so big, the P/E multiple would be a lot higher. They almost doubled their earnings in calendar year 2011 and yet the stock is trading currently at a P/E multiple of less than 11. It’s trading way below the market average, even though it’s growing way above the market average. The multiple is being compressed simply because investors are asking how it can get bigger.”

Cihra also pointed out that the reason why Apple has continued growing at this rate is because they target the world’s biggest markets. They also still have a small share of huge markets at around single digit shares in both PCs and mobile phones. Global mobile phone subscriptions hit nearly six billion in 2011 and Apple’s market share was at 5.6%.

“The valuation on Apple stock right now is unjustifiably low,” Mr. Cihra said. “If it weren’t so big, the P/E multiple would be a lot higher. They almost doubled their earnings in calendar year 2011 and yet the stock is trading currently at a P/E multiple of less than 11. It’s trading way below the market average, even though it’s growing way above the market average. The multiple is being compressed simply because investors are asking how it can get bigger.”

This article was written by Amit Chowdhry. You can follow me at @amitchowdhry or on Google+ at
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