$AAPL and the Limits of Growth

May 15, 2012 § Leave a comment

It has become a cliché after every blowout earnings call to say that Apple can’t keep growing forever. While technically true (I doubt Apple would survive the heat death of the universe), that assertion by itself is useless. The real question is how long could Apple keep growing at its current rate.

Somewhat surprisingly, I haven’t seen any such analysis. Financial analysts seem barely to think more than a quarter in advance, and industry analysts seem to implicitly assume Apple will implode. So — as a thought experiment, not a prediction — I want to put together a plausible baseline for how much Apple’s existing businesses could grow.

Let’s start with a few assumptions.

1. iPhone’s share of the total mobile phone market will eventually match its current share of the U.S. app phone market.

This assumes:

  1. Every feature phone will eventually become a modern smart phone (aka “app phone“)
  2. iPhones will eventually compete globally against Android as well as it does in the U.S.
  3. Windows Phone, if it succeeds, will only eat into Android market share

While none of these are certain, they are certainly plausible.  While it is true there will be always be a market for very low-cost phones, it is at least conceivable that Android will (and perhaps already does) service that market.

Using similarly hand-wavey logic, we get:

2a. Tablets will be to PCs what laptops were to desktops (~70%)

2b. iPads will retain their current dominant share of the tablet market, which is additive to the PC Market.

3. Apple’s units will grow linearly exponentially until we reach 50% on the logistic function.

Again, far from certain, but plausible as a starting point.  Now let’s plug in some numbers.

  1. iPhones have around 40% of the U.S. App Phone Market
  2. iPads have at least 70% of the global tablet market
  3. Apple sold 93 million iPhones and in Calendar 2011, grown around 100% year-over-year
  4. Apple sold around 35 million iPads in Calendar 2011; assume the same growth as iPhone
  5. The traditional PC market is around 300 million in annual sales (assume zero growth)
  6. The Mobile market is around 1.5 billion annual units (assume zero growth)

Warning: I just grabbed the first sensible numbers I could find, so these may be more convenient than accurate.  Still, they should get us in the ballpark.

I. iPhones

If Apple splits the future of mobile with Android as it does now, it could sell 600 million iPhones annually.  At current growth rates, it would sell 180 million iPhones in 2012 and 360 million iPhones in 2013. Our model implies linear growth would start slowing late in 2013.  Presumably Asymco would start seeing this effect in Apple’s early 2013 CapEx.

II. iPads

If tablets make up 70% of the post-PC marketplace, that implies 700 million tablets vs 300 million PCs.  A 70% iPad share of that is around 500 million iPads.  Doubling ever year gives us: 70M @ 2012, 140M @ 2013, and 280 M @ 2014, which takes us to the halfway point on our logistic function.

So this very crude model with poorly-justified but plausible assumptions predicts iPhones could easily keep growing at their current rate for 1.5 years, while iPads could do the same for 3  years. Note that the model assumes that both would still eventually double again, just not every year the way they do now.

Analysis

If growth does slow in 2015, then Apple might actually deserve its ridiculously low P/E ratio of 14.  But by that point Apple could conceivably be selling 700 million iOS every year; a more rigorous and conservative estimate by Asymco has around 600 million iOS devices sold in 2016.  That’s still around five times the amount sold in 2011.

If stock price tracked only that number (not that it really tracks anything) $AAPL would have a market cap of 2 trillion dollars.  Hard to imagine, but not a priori impossible. Makes a trillion sound reasonable!

To be sure, lots of things could prevent Apple from reaching that goal, from structural difficulties in reaching the developing world to heightened competition from Android and Windows 8.  On the other hand, Apple could also introduce new iOS form factors that would add to these numbers.

We don’t really know.  However, the next time someone says Apple is running into the “Law of Large Numbers”, I plan to tell them, “Not for another couple years.”

P.S.  I haven’t done this kind of analysis in a long time.  If I made some stupid error, please let me know in the comments.

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