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. They cannot. They never do. There’s some kind of law of big numbers taking effect, so, 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. 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.