What goes up, must come down. As of today, Apple, Inc. is riding a wave of good news numbers that make the company more valuable than Intel, IBM, HP, and double that of Dell.

What’s next? Remember that old adage, ‘what goes up, must come down?’ Apple, as it has always been with other large, rapidly growing technology companies, faces tough times ahead.

Fiscal 2007 was an absolute massive year for Apple with record numbers in nearly every financial category, all of which combined to push the stock into uncharted territory. Michael Dell must be rolling over in his grave. Oh, wait. He’s still alive? Who knew?

Record revenue of about $24-billion. Record Mac sales, record iPod sales, fabulous iPhone launch, record profits, record stock price. It may be a couple of years, but the law of big numbers is about to catch up with Apple’s high flying growth. It always does.

Let me use Dell as an example. When Dell hit $50-billion in annual sales, a mere 10-percent annual increase, far less than expected by investors, amounted to growth of $5-billion a year. What company can come up with a new $5-billion business each year, every year, with corresponding profits and unit sales?

The answer? Not many. And Apple just passed most of them in market value: IBM, HP, Dell, Intel. What’s next? Microsoft. Except for a massive stock buy back program MSFT has languished for five years despite good growth and profits.

In other words, Apple will hit a wall. Possibly sooner, rather than later, but Apple will hit a wall. It’s Kate’s Law. Everything hits a wall. Why and how, in a moment.

Let’s look at Apple’s numbers for 2008 to 2009. iPod sales will continue to grow, as there is plenty of market penetration left, but not at the pace of the past few years. See? There’s that wall again. Mac sales are running at about 35-percent annually, or, triple standard PC market growth. Does anyone expect that to continue unabated for another five years. See? There’s that wall again.

In other words, Apple’s recent revenue and profit growth rates won’t continue. Neither will the stock price. They cannot. They never do. There’s some kind of law of big numbers taking effect, so, a slow down looms ahead. The real questions are 1) how much, 2) when, and, 3) what will be the effect on the stock price?

Apple did a curious thing with the iPhone. Revenue is amortized over a two year period so Apple can provide software updates and enhancements without charging customers. Customers will love it, but the expected massive gains in revenue for an exploding iPhone market won’t be there. Financial growth in that segment of Apple’s business will be more gradual.

Assuming a 25-percent growth in revenue and profits for 2008 on growing Mac, iPod, iPhone sales, Apple could hit $30-billion by this time next year with Mac sales of nearly 3-million quarterly. That’s still not enough to overtake Dell or HP in the US, but it carves out a solid double-digit market share for the Mac.

Assume another 20-percent growth for 2009 and Apple starts to approach revenue levels of a $40-billion company. To grow at 20-percent a year requires Apple to come up with another $8-billion in revenue each year from 2009. That’s a lot of gadget boxes going out the door. Just 10 years ago, Apple sold less than 3-million Macs a year and lost billions doing it. That was then, and this is now.

Apple has $15-billion in cash tucked away in a few banks here and there, so the company is wildly profitable and is likely to continue so even after ”hitting the wall” in a couple of years. Another wall that Apple is beginning to hit now is what I call the ”backlash” wall. Some people are beginning to hate Apple the same way that people hate Microsoft, and, in some cases, for the same reasons.

I target Apple’s notable slowdown in units sold, revenue growth, profit growth to begin by 2009. True, all numbers might still be records, but the rate of growth in those numbers has to hit that wall, including the stock price. Consider it Kate’s Apple Axiom. Happens. To. Everyone. But does that scenario spell doom for Apple? No, but it might spell a difficult time for AAPL, and that’s the point. When is the best time to exit the rocket ship?

If 60 is the new 40, then Google is the new Microsoft. The stock is sky high or higher than the sky. Profits are surging. There’s little competition. Who am I talking about? Google, or Microsoft? See the problem? What goes up, stops going up as fast, and more often than not, falls back down to less heady stratospheric levels. It did for Microsoft. It will for Google. It will for Apple.

The law of big #s. It affects companies, stocks, mutual funds and lots of other stuff. Apple’s current PE is over 52. The sandbox they are playing in was declared dead years ago and we witnessed IBM selling their PC unit to Lenovo. The margins for hardware makers is no where near that of software retailers. And then you have the economy which has been expanding for almost a decade but that faces many potential potholes such as the housing market downturn, subprime mortgage fallout, big fires and hurricanes, and international tensions. Add uncertainty in the direction of the war, the election, and the stock market, and you have a recipe for heartburn.

With all that, I agree that Apple still has a lot of room to grow. They keep making new stuff that’s so compelling that a good % of the Apple faithful turn over our stash ever couple years. We simply cannot resist faster, sexier hardware. Then you have the retail stores where a huge % of buyers are switchers, plenty of breathing room in the market share dept., freaky-great OS within days of release, and serious momentum both in the business and the market. The market is said to be driven by fear and greed. Right now, AAPL knows no fear.

Where can new growth come from? Slim portable. New gadgets only Apple knows about. New iPods that cause us to ditch our old. Continuous updates of iLife and iWork and iWhatever. Much better penetration into the corporate world. Much better penetration into the living room with AppleTV and additional revenues from iTunes movie rentals.

Lastly, I really don’t think Apple has hit their tipping point yet. There’s a huge chunk of the population that buys what everyone else buys. Apple is still at the point where growth in market share is going to lead to further growth of market share.

The big danger? Steve’s health. The fundamentals are certainly there, but as I said above, FEAR and greed drive the market. If Steve were to.... see, I can’t even say it.

You gotta love these Mac360 articles that have little to no basis in higher economics whatsoever.

Kate’s Law?  Gimme a break.  What’s your degree in, anyway?

Sure, Apple would hit a wall if it decided to just sit on its hands and attempt to ride the wave of its current laurels.  But that isn’t Apple.  Apple is an innovator, and if it continues to innovate and produce new, desirable products that work well and look cool, there’s no reason to think that they’re going to hit this fictional wall you’re talking about.  I have no doubt that there are things on the horizon in high tech that we haven’t even CONSIDERED yet, because for the most part we are all outsiders, and not privy to the back rooms of research and development.

bugsnw, fear not. Steve is a health freak with money. That can add years to one’s lifespan.

Kate, I understand where you’re coming from, but everything obviously is relative. Of course Apple cannot sustain perpetual growth, but I don’t believe they’ll “hit the wall.” Growth will slow, surely, but it’ll be slow enough that seat belts won’t be needed. Apple has done things no other company has been able to do, and I see no reason why they won’t continue to do it. Lessons have been learned from the past, and there are a lot of very smart, creative people working at Apple. Where will it end? Interestingly, many people (myself among them) do not want Apple’s market share to grow too large. Most of us would be happy at, say, 20 to 30%. Maybe it’s smugness, or maybe it’s a fear that Apple may become the next Microsoft; I don’t know. The backlash part I can agree with, but as long as Apple remembers to give value for the consumer’s dollar, maybe that will occur only on a very small scale. I hope all this makes sense. My thought processes are a little fuzzy today. Oh, then there was the stockbroker in front of me in line waiting for the iPhone. I had bought Apple stock two days before at $119. He told me it had already peaked in anticipation of the iPhone, and any further rise could not be sustained.

You gotta love these Mac360 articles that have little to no basis in higher economics whatsoever.

Like you know something of higher economics? Gimme a break.

Kate’s Law?  Gimme a break.  What’s your degree in, anyway?

What difference does it make? The point is so freakin’ obvious to almost all readers-- Apple cannot continue to put up such hefty gains in revenue and profits because Wall Street sets expectations that eventually will not be met. Higher economics notwithstanding, it ALWAYS happens, and when it happens Apple’s stock price will take a long deserved hit.

That’s the “rough road ahead.”

Sure, Apple would hit a wall if it decided to just sit on its hands and attempt to ride the wave of its current laurels.  But that isn’t Apple.

All companies hit that wall where reality doesn’t meet expectations. All. Name an exception.

Apple is an innovator, and if it continues to innovate and produce new, desirable products that work well and look cool, there’s no reason to think that they’re going to hit this fictional wall you’re talking about.

Fictional? Bwahahahaha! You know not of what you speak. ALL companies hit that wall. All. What part of all do you fail to understand?

I have no doubt that there are things on the horizon in high tech that we haven’t even CONSIDERED yet, because for the most part we are all outsiders, and not privy to the back rooms of research and development.

But we’re all privy to the effects of gravity…

Thanks for the most telling points of the responses so far.

bugsnw - 23 October 2007 02:36 PM

The law of big #s. It affects companies, stocks, mutual funds and lots of other stuff. Apple’s current PE is over 52. The sandbox they are playing in was declared dead years ago and we witnessed IBM selling their PC unit to Lenovo. The margins for hardware makers is no where near that of software retailers. And then you have the economy which has been expanding for almost a decade but that faces many potential potholes such as the housing market downturn, subprime mortgage fallout, big fires and hurricanes, and international tensions. Add uncertainty in the direction of the war, the election, and the stock market, and you have a recipe for heartburn.

Isn’t that the point? What goes up, mostly comes back down. So the real issue is “when?”

With all that, I agree that Apple still has a lot of room to grow. They keep making new stuff that’s so compelling that a good % of the Apple faithful turn over our stash ever couple years. We simply cannot resist faster, sexier hardware. Then you have the retail stores where a huge % of buyers are switchers, plenty of breathing room in the market share dept., freaky-great OS within days of release, and serious momentum both in the business and the market. The market is said to be driven by fear and greed. Right now, AAPL knows no fear.

And so people continue to buy the stock based on greed? They’ll sell based on fear.

Where can new growth come from? Slim portable. New gadgets only Apple knows about. New iPods that cause us to ditch our old. Continuous updates of iLife and iWork and iWhatever. Much better penetration into the corporate world. Much better penetration into the living room with AppleTV and additional revenues from iTunes movie rentals.

Hey, why hasn’t anyone jumped on that one? Apple TV has been a big failure so far. What happened to the thousands of movies? iTunes is big, of course, but not so big that the movie producers are willing to give up their shorts to have their wares plied on iTunes.

Lastly, I really don’t think Apple has hit their tipping point yet. There’s a huge chunk of the population that buys what everyone else buys. Apple is still at the point where growth in market share is going to lead to further growth of market share.

Can’t argue with that. For those of us who loaded up on Apple stock in the past few years, this is a good ride. Now I gotta figure out when to get off.

The big danger? Steve’s health. The fundamentals are certainly there, but as I said above, FEAR and greed drive the market. If Steve were to.... see, I can’t even say it.

Look at it this way. What would happen if Bill Gates died tomorrow? Nothing. There’d be a brief blip in the stock price, but Microsoft would continue to churn out mediocrity as always.

But what would happen if Steve Jobs died tomorrow? He is so tied into the company’s fortunes that the stock is likely to take a huge hit as investors abandon the ride, take their winnings, and move on.

BTW - it doesn’t take a degree in math, or a degree in higher economics to figure that one out. Therefore, it’s not a matter of if, but when.

Kate, nicely done. Thanks for sticking your neck out on the limb and calling it as it is. What goes up, often comes down.

I tend to think that Apple’s fall from the Stock Price Stratosphere will be more catastrophic than some may consider, but I do not think it will happen in the next couple of years.

iPods and Macs and software are highly profitable items for Apple and are likely to remain that way for a few years. Check this note on the potential profitability of the iPhone. It would appear that iPhone profits are tied to the monthly contract rate from A&TT;. Therefore, any drop in sales of the iPhone due to market pressures or competition are not likely to be felt for 24 months, as carrier contracts end. Over the next few years the iPod and the iPhone and the Mac will continue to grow in market penetration in other countries besides the US. There’s Europe, Asia, South America. All have some leg room to help Apple grow revenue and profits.

In the short run, perhaps 3 to 5 years, Apple will look very, very good as an investment because there’s markets to be gained. However, should something happen to Steve Jobs, all bets are off and I would dump my precious AAPL shares in a heartbeat.

Everything Danny Boy said

Sorry, logic doesn’t work that way.  Her arguments were specious at best.  Saying “a company can’t make money forever and people will get sick of them” is a weak premise, so it’s not really on me to disprove that.  It disproves itself.  Doesn’t matter what my credentials are...anyone with a grasp of critical thinking can see how her premise needs more empirical proof.

She’s pretty and everything, but her research is lacking.  Some specific examples from past companies that answer the big questions (who what where when why how) would have been useful.  Don’t get me wrong.  I’d love for Kate to be right.  I just want her to prove it and convince me.  I like being convinced.

Flux - 24 October 2007 07:53 AM

[Sorry, logic doesn’t work that way.  Her arguments were specious at best.  Saying “a company can’t make money forever and people will get sick of them” is a weak premise, so it’s not really on me to disprove that.  It disproves itself.  Doesn’t matter what my credentials are...anyone with a grasp of critical thinking can see how her premise needs more empirical proof.

Except that what you just said is not my argument. The premise seems obvious to all but you. And, yes, logic does work that way. Since it’s an opinion, no empirical proof is required, however, I notice that you avoided all the opportunities to show a single example of a company that has never ”hit the wall.” They all do. Apple will. That’s the premise. The next set of questions concern when, where, how, why, blah, blah.

She’s pretty and everything, but her research is lacking. 

Oooh, a compliment, then an insulting slap in the face. Come on. Think different. That makes me want to understand your argument. Uh huh. Sure.

Some specific examples from past companies that answer the big questions (who what where when why how) would have been useful.

Which is the point. There are none. All companies ”hit the wall.” The stock will drop or languish, and not for a day or a week or so as it follows market trends, which happens to stocks in general, but for a substantial period of time. One of the challenges issued above was to prove my premise wrong by coming up with examples of mature stocks that have not ”hit the wall.”

How about the stock darling of the 1980s and 1990s? MSFT. Microsoft hit the wall despite continued revenue growth and hefty profits. Why? Probably because they stopped creating new markets to conquer and had plenty of failures in those markets they attempted to enter. Look at MSFT’s five year performance. Not much going on since the last split, huh? That’s ”the wall.”

Don’t get me wrong.  I’d love for Kate to be right.  I just want her to prove it and convince me.  I like being convinced.

I think you just like to argue. BTW, I know you said you’d love for me to be right, but wouldn’t it really be better for investors if I was wrong? See? I didn’t even need a degree in higher economics to figure out which was better.

I shall play the coward in all of this and hold the line right down the middle of the road. Yes, Kate is right in saying that AAPL will drop. At some point. It has done so a few times in the half decade I have been using it as my IRAs engine (I only have 13.3% of my original investment, and that is worth 4.5 times the initial investment fot the whole thing).

I must, however, point out that when it comes to stock price, a fall is not enough to warrant concern. It takes better than six months of stagnant or falling prices based upon failure to meet internal guidance to become an issue for most large cap companies. Apple has, over the last decade, remained relatively conservative with regard to its own guidance, and Wall Street has largely followed, making it possible for Apple to have small-growth quarters, or even years, without having a strong downward impact on the stock price.

We are facing competing factors, too. Apple has had trouble at times meeting production figures on certain products, but as it has become clearer that Apple is a serious player, larger manufacturers have been willing to sign on. This allows Apple to scale upward gracefully. Similarly, the law of big numbers is in play here, but we have to remember, too, that the numbers are far from “big” in the terms this industry traditionally understands. With a 6% share, Apple is still five years, at 30% year-over-year growth, from crossing the 20% share line.

Can Apple sustain 30% year-over-year growth for that time? Well, history has suggested that it may be able to, not on momentum alone, but on new products, too. Consider the one form factor people have been begging Apple to make: a tablet. Apple, with the last product people had been begging it to make—the iPhone, proved it has the technology to power. Move that interface to a tablet form factor, and Jobs (whose health is fine, given that his pancreatic cancer was a rare form that was curable, not merely treatable, and was treated) can come out and say, “This is what the tablet has always wanted to be.” What will that do? Create irrational exuberance regarding AAPL? expand the RDF to encompass an even larger area (maybe even Paul Thurott)? I can’t be sure.

I would ask this of parties on both sides (including Flux’s interesting comment that he hopes Kate is right about the price of AAPL): Rather than asking when this will happen (it will), what about some predictions about the year? I say not before the quarter ending March 31, 2010, and probably later than that. I just see too many insanely great next big things that no company has done properly yet, but I certainly know one company that could get them right (on the second try).

Anyone for a true successor to the Newton?

Kat good article.  I’m glad this is not some dry economic dissertation about Apple’s future.  I do see Apple’s meteoric rise to slow but I’m thinking it’ll be more because of a slow US economy than product stagnation.  The chief advantage that Apple has over Dell, HP and IBM is that they own the OS.  Steve has called it a license to print money (being the owner of a high volume OS) and he’s right.  I see tremendous growth opportunity for Apple in many areas.  I’ll highlight some that I’d love to see more focus on.

SMB HW and SW

Let’s be real.  Leopard is really the 1st Server OS that is ready for Primetime with Mail and Calendar servers (cluster ability as well) Wiki, and nice security features.  Apple needs to begin a push into the SMB market which is growing faster than the big Enterprise markets.  There is a lot of money to be made here.  Small companies cannot afford large IT staff.  If Apple con continue to enable less IT admins cover more workers they have a promising future here.  They should continue to leverage open standards (CalDAV, Apache, etc) and add the Apple spit polish.

Consumer Electronics

There’s an ineptness that pervades the CE industry.  These people know hardware but they suck and UI and software.  Don’t let the boo birds trashing the Apple TV sway you.  Apple is waiting for the infrastructure to improve.  HD downoads of movies from iTunes as Rentals is a given. Apple is at both ends of this spectrum working hard with Final Cut Studio at the production end and ATV at the playback end.  I see Apple sticking with this and leveraging their Airport tech, bonjour networking and A/V tech to create distributed A/V networkings in the home for a fraction of what it costs today.

Telephony

The iPhone is just the start.  Look at how powerful .mac is becoming in Leopard where it syncs so many more items.  The era of ubiquitious computing is coming where I’m going to have access to ‘everything’ in my iphone and when I come home my laptop and desktop computers will already be sync’d with the changes I’ve made during the day. 

I see Apple getting into VOIP.  I see no reason why the future home in less than 10 years shouldn’t have VOIP based telephony with Unified Messaging.  I should be able to access my voicemail like any other file (cough ..visual voicemail) and have a plethora of other services at my beck and call.  How about a simplified Apple Digital PBX? 

Automobile

Rumors are already out about Apple lending Automobile makers a hand in designing UI for GPS functionality and other controls.  Apple’s multi touch would be a natural for the small confines of a automobile.
In summary are lives are ruled by data.  What am I’m doing ..where am I’m going and with who at what time?  Apple needs to look at every step of the chain and ensure they have the ideal solution.  If they do that we can look forward to a day where Apple and Microsoft are neck and neck.

I’m going to toss in my two cents, with a warning that I don’t have any degree in “higher economics” either.

I don’t consider the Mac’s recent increase in market share as an unnatural situation that can’t continue much longer, as many writers in the field seem to. I consider its tiny market share (recently increasing from two percent) an unnatural situation, resulting from the palace revolution that left insensate bean-counters in charge and robbed the Mac of twelve or thirteen years of its rightful growth. You can love or hate Steve Jobs, but he is a man with a vision, and Apple without vision is, well...Microsoft.

I think what gave Apple enough time to survive and eventually recover is that they suckered Microsoft into imitating them. True, even with Scully handing Microsoft the core of the Macintosh UI, Windows is even more of a resource hog. The original Mac really had too much overhead for the electronics of the time to support. Microsoft could easily have made DOS a lot more user-friendly without stretching the hardware too far and left the Mac in the dust. Instead , they chose to steal the Mac UI (yes, I’m sticking with that word) and since they’ve never been able to write efficient code, made it into the bloated monstrosity that we know and hate: Windows!

So maybe it was all for the best; when Apple was reborn in 1997, the hardware had caught up with the software, but Windows was already too deep in code bloat to get out again. Now the Mac is on the natural upward trend it should have been on since 1984, and Microsoft has hobbled themselves with twenty years of bad decisions. Will the Mac ever reach parity with Windoze machines? Probably not; they’ll undoubtedly never play in the shallow end of the pool with $400 disposable boxes. I look for Linux to make large inroads there, if massaging it and its applications becomes a little less intimidating. In any case, Apple and Linux have nowhere to go but up; Microsoft has nowhere to go but down.

Now with the foregoing opinion and $1.89, you can buy a cup of coffee!

The interesting question is when. When to get on. When to get off. We’re supposed to buy low and sell high. Many end up reacting and buy high and sell low.

True, Kate didn’t invent the law. The law of big numbers has been around for a while. The problem is people aren’t very good at predicting when companies will hit that wall. And even if the company seems sound and oozing with potential (which Apple is), external forces also wreak havoc on stock prices.

Here’s an interesting Google quote:

Google Inc.’s chief financial officer, George Reyes, said the Internet giant’s growth is slowing due to the “law of large numbers” and it will need to find new ways to boost revenue.
The comments, made at an investor conference, surprised Wall Street and triggered a selloff in Google’s shares. In heavy trading, Google shares fell 9%, or $37.70, to $354 on the Nasdaq Stock Market.

That was early ‘06 and Google currently trades at $675.

Barring a turn in SJ’s health, and the economy’s health, I see Apple charging ahead for a few more years. I wouldn’t (and haven’t) bet on the 2nd point. I think the economy is going to be a factor in Apple’s sales.