A lot has been written lately about “exponential growth,” nearly all of it wrong. If you want to see what real exponential growth looks like, check out the graph of Apple’s revenues and profits . And this tells an important story about Apple the commentators, including financial analysts who should know much better, have completely missed. Explosive growth over the past few years has transformed Apple from a scrappy underdog into one of the largest companies in the world–it should break into the top 10 of the Fortune 500 this year. And things become very different when you get this big.
Of course Apple’s growth is slowing down. The thing about exponential growth is that it is inherently unstable and unsustainable. If Apple continued along its a 2005-2012 growth track until 2016, its annual sales would be nearly a trillion dollars, a clear impossibility. In fact, the single most remarkable thing about Apple is that it managed to sail smoothly through a growth spurt that would have destroyed many companies. And this all the more remarkable because it simultaneously went through the transfer of leadership from the late Steve Jobs to Tim Cook.
Regardless of how quickly Apple grows over the next few years, the growth that has already occurred has transformed the company in ways that both its fans and its critics ignore. The Apple that introduced the iPhone in 2007 was a middling-sized company with $24 billion in sales and 24,000 employees. It was a cheeky upstart in the phone business, a fifth the size of the AT&T with which it drove a hard bargain to be the exclusive carrier of the iPhone at launch.
Lots of things happen happen to a company when it grows this big, most of them bad. A certain amount of bureaucracy is just required to keep the wheels turning. Corporate functions, such as human resources and legal, swell. Apple seems to have done a splendid job of keeping the bloat that comes with rapid growth under tight control; amazingly Apple’s employment tripled in a period when its sales increased six-fold (meaning, of course, that sales per employee doubled, a spectacular accomplishment.) Above all, the bigger you get, the harder it is to maintain a rapid rate of growth because the absolute size of the increase you must generate explodes.Apple seems to have done a splendid job of keeping the bloat that comes with rapid growth under tight control.
In fiscal 2007, Apple sold 7 million Macs, 51.6 million iPods, and 1.4 million iPhones. In fiscal 2012, it sold 18 million Macs, 35 million iPods, 125 million iPhones, and 58 million iPads. One thing that stood out in Apple’s “disappointing” first quarter of fiscal 2013 is that sales of the iPhone and iPad were constrained by supply. The supply chain appears to have fallen a bit short, but given the growth experienced, it’s a wonder that the supply chain is functioning at all. Think of the number of components that had to be purchased, assembly lines that had to be brought on stream, and finished product that had to be shipped, often half way around the world, to accommodate that growth. And all of this was accomplished without any evidence of the quality problems that usually accompany rapid expansion. The supply issues of the past couple of quarters were probably inevitable; they do not diminish the reputation Tim Cook has earned as a supply chain genius for managing the growth.
What mostly needs adjusting is expectations for Apple. All the speculation about whether Apple has lost is mojo, or its cool, or whatever fails to consider that what Apple has lost is its ability to grow quickly, not because of anything its management is doing wrong but as a function of pure size. Look at it this way. From its 2010 introduction through fiscal 2012, the iPad generated about $57 billion in revenue, about half of Apple’s total revenue growth through the period. But for a hypothetical new product to make a similar contribution over the next three years, it would have to be twice as successful as the iPad in dollar value terms. That’s not likely to happen.
What does all of this mean for Apple’s stock price, the source of so much angst of late? The odd thing is that even when Apple was growing most rapidly and its share price was rising quickly, the market didn’t act as though it expected the growth continue. The ration of the stock price to trailing 12-month earnings last year peaked at just a bit over 15, very low for a company whose sales and earnings were growing phenomenally quickly.
The market was right: The growth had to slow. But even though the stock was priced seemingly in anticipation of slower growth, investors responded to the seeming reality of a slowdown by driving the price down so hard that the P/E fell below 10 (it has since recovered a bit along with the stock price.) There may have been plenty of reasons for the stock price to stop going up, but none but emotion for a 30% decline.
None of which is to say anything about where the price will go next. Markets will do what they do. Apple remains an extraordinarily well-managed company with a very strong product portfolio and, I suspect, the ability to surprise us again with new and innovative products. But I doubt that we will ever see another spurt of growth like the past five years. Apple has just plain gotten too big for that to happen.