Edible Apple

With another one of Apple’s blockbuster quarters in the bag, NetworkWorld published a piece detailing Apple’s ongoing financial success and the ill-conceived notion that Apple’s earnings growth can’t continue because of the law of large numbers.

People like to look at Apple and ascertain how much more money Apple has to earn in order to maintain the impressive growth rates investors have enjoyed over the past few years. But in doing so, they completely miss the point and ignore the variables that actually matter.

When considering the law of large numbers, it makes much more sense to study a company’s marketshare and prospects for growth than it is to look exclusively at their current revenue and past performance. Yet that’s what analysts who like to tout the law of large numbers tend to do. They look at Apple’s size and reflexively bring up the “law of large numbers” and shout, “Ya see how big Apple is?! There’s no way it can continue its phenomenal growth, there’s just no way!”

But the real operative variable isn’t revenue, but rather the factors that drive revenue – margins and marketshare. And when it comes to those two metrics, Apple is sitting pretty.

Interestingly enough, Apple CEO Tim Cook addressed the law of large numbers during a recent speech he gave at a Goldman Sachs Technology Conference.

Apple during the last holiday quarter shipped 37 million iPhones, an all-time record, and a figure so high that it prompted someone to ask what growth opportunities Apple still has ahead of it.

Cook astutely responded that the 37 million iPhone figure only represents 24% of the smartphones bought in the last quarter. And the number is even smaller when you look at the worldwide mobile phone market.

“As I see it, that 37 million for last quarter represented 24% of the smartphone market,” Cook explained. “There’s 3 out of 4 people buying something else. 9 out of 10 phone buyers are buying something else.

Handset market is projected to go from 1.5 to 2 billion units. Take it in the context of these numbers, the truth is that this is a jaw-dropping industry with enormous opportunity. Up against those numbers, the numbers don’t seem so large anymore. What seems so large to me is the opportunity.”

via Asymco