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.
11 thoughts on “Apple and the Burden of Bigness”
It’s really good to read an analysis of Apple based on calm reasoning. I haven’t seen a lot of that lately.
Any very successful company will have its share of haters – that seems to be human nature – and Apple has its share of them. But the haters make statements about Apple which are so disconnected from reality that it’s like they actually believe the sun rises in the west. It’s weird.
And yet Amazon posts losses, again, and it’s stock rises. Go figure.
And not just losses, but missing expectations.
Excellent article Steve. Unfortunately, I think the nature of the way the stock market works today has made rational discourse on companies obsolete. In the days when people purchased and held stock, reasonable assessments on the valid strengths and weaknesses of a company were valuable information. Nowadays, people are looking for early indicators to enter and exit stock positions. Information is much more faulty on the leading edge and there is a lot of ego and superstition involved.
If every American company were run as well as Apple, the U.S. would be immersed in a Golden Era the likes of which have never been experienced in history. But a lot of traders and analysts are continually looking for the chink in the armor so that they don’t get stuck holding deteriorating positions too long. In some regards, they are manipulating outcomes, which is a lot safer and more profitable than allowing natural outcomes to occur.
Great analyses are responsible but I don’t know if they are valuable anymore. I think some people would be better off with a Magic 8-ball than intelligent analysis.
I understand the frustration, James, but I like to believe (maybe foolishly) that time is more powerful than moments of delusion and that companies like Apple and Amazon will succeed and fail on their sincerity and good, or not so good, works. I also believe in structured water, free energy and that the pyramids were not chiselled together with soft copper tools in twenty years which may put my simple economics postulation in perspective.
“I also believe in structured water, free energy and that the pyramids
were not chiselled together with soft copper tools in twenty years…” – mhikl
LOL, then we probably have a lot in common. 😉
Well, there’s exponential growth and “exponential” growth. 1% growth per quarter, even if it lagged inflation, would be perfectly “exponential.”
Now after making fun of people who seesaw wildly about how fast Apple grows its business, let me discuss a more fundamental one: HOW Apple will grow. Lots of people seem to either think Apple should play Google’s game of “the only thing that will be profitable is our ability to influence/control people’s buying decisions,” or concerned that Apple’s skills in inventing, designing, curating, organizing and managing down to the tiniest detail (a playbook that almost nobody else in tech is good at, and that, in particular, Google fumbles), are no longer going to be as valuable as they have been.
I won’t claim that Apple can make game-changers every 3 years, but it’s insultingly oblivious to assume that an organization built to ding the universe by bringing friendly tech to people, all of a sudden will fail. Some of the naysayers who were so disappointed that Apple didn’t come out with a new TV, or start selling a $150 phone in China, probably can’t even describe what Apple would have been doing, in secret, for the past years, if their goal was to, for example, become the most-widely-used, quality phone in China, and in much less time than it took in the US. Let alone say that that isn’t happening.
That goal (that I just made up) seems a whole bunch more likely to be Apple’s than an effort to capture 50 million sales a year at a $30 margin per unit, to get volume at the expense of their ability to really satisfy.
Finally, I’ll endorse whole-heartedly and verbatim, one of Steve’s points: none of which is to say anything about where the price will go next.
Strictly speaking, exponential growth implies a function of the form a^x, where x is positive. As long as a>1, growth will accelerate at an accelerating rate, and that is what is inherently unstable.
Mr. Market buys glowing velvet landscapes, not real growth. And he buys promises rather than profits. Amazon and Google whisper sweet nothings in Mr. Market’s ears.
This is the best time for apple to buy back its stocks at lower, cheaper prices. Understandably, the bears just cashed out of Apple when they had the chance. The other traders just reacted, I mean heck who’d wanna keep investments that would dip lower than the price they’ve bought them anyway.. And as long as this sentiment is in the market, no bull is ever gonna outnumber the bears selling the stocks of Apple.
They say: Apple has no users, Apple has fans. I agree because I am the biggest Apple’s fan. But being an Apple fan does not mean we are blind, or that we refuse to see reality. And reality shows that Apple has a lot of enemies and haters. Apple has done an amazing job during last years, but very few people recognize this, it seems that always it is easier to attack blindly, without arguments or any proofs more than rumors. When Apple says “We sold 35M iPhones”, the experts and pundits will say: “What a disappointing sales, Apple is done”, but when Samsung says “We SHIP 35M of different handsets”, then the experts and pundits will say “Samsung’s unstoppable growth crushes Apple”. How is it that two companies with such similar results are treated so differently? There is so much hate against Apple that it is hard not to side with the “helpless”, with the defenseless. I know very well that Apple does not need anyone to defend it, but it strikes me how heinous it is attacked by the supposed experts and pundits. This is really disturbing. Apple is the only one company that publishes its figures, real figures: sales, revenues, profits, etc.. and what it gets in return? Nothing but insults, rumors, bad publicity and, ultimately, more hate. I wonder why?
As always, excellent article Steve. Thank you very much for your objectivity and your intellectual honesty. Best regards from Mexico.