The Downside Of Apple's Growth

By Ryan C. Fuhrmann | March 28, 2012 AAA
The Downside Of Apple's Growth

Apple Inc.'s stock recently hit a number of impressive milestones. The share price rose above $600 per share to reach record highs. Additionally, its market capitalization, or share price multiplied by shares outstanding, reached $500 billion. Not since the dotcom craze has a technology firm reached a market cap of a half trillion dollars.

SEE: Market Capitalization Defined

A Stellar History
A company's stock price follows the fundamentals of its underlying business over the long haul, which, judging by the meteoric share price rise, means that Apple's operating growth has been nothing short of remarkable. Over the past decade, both sales and earnings have grown at an average annual clip of more than 35%. Sales are up from below $6 billion in 2002 to nearly $128 billion over the past 12 months. Profits have risen from $65 million to $33 billion over these time frames.

By all indications, Apple's growth is only accelerating. Sales are up more than 41% annually and profits 65% over the past five years. For the coming year, analysts project 45% sales growth and 54% earnings growth. Roughly a decade ago, it introduced consumers to the iPod and revolutionized the music industry with this popular device and iTunes music store. It followed this up with the iPhone and iPad to revolutionize the mobile phone and tablet computer spaces.

One individual recently attributed Apple's success to the introduction of products she didn't realize she needed. Millions of consumers can also attest to Steve Jobs' vision, which started more than three decades ago with the introduction of Mac computers. During his hiatus from Apple, he brought Pixar to moviegoers, revolutionizing the market for animated films. He then returned to create the iPod.

An Uncertain Future
The downside of Apple's stunning string of successes is that it makes future returns much more difficult. The tragic loss of Jobs certainly calls into question its ability to come up with another steady stream of game-changing consumer gadgets. But perhaps more importantly, Apple operates in the fast-changing, ultra-competitive technology industry, and there is plenty of precedent that suggests it will fail to remain a leader in all of the markets it now dominates.

In the music industry, digital streaming and a subscription model are fast supplanting the downloading of music to the iPod device and the need to pay for each song or album. Pandora is popularizing the streaming of music for a flat and affordable annual fee, with a free version available for those willing to put up with a commercial during every few minutes of music listening. Spotify is allowing users to create a library of customized music for a monthly fee, as well as free on a computer in exchange for listening to some commercials.

In the mobile phone space, Samsung is fast on Apple's heals. More importantly, Motorola and Nokia grew to dominate the industry with popular phones, just as Apple does now, but saw their dominance vanish to competitors. Motorola's phone division was recently snapped up by Google, which itself now rivals Apple's software with its Android software. Nokia used to control close to half of the global market, but is now fighting for relevancy in the face of Apple and Samsung.

In the tablet space, a number of more affordable rivals, including devices from Samsung, Barnes & Noble, Sony and Amazon, have already surfaced. The personal computer space is also trying to regain dominance in the laptop space. With this and its other devices, Apple could have a difficult time maintaining its dominance.

The Bottom Line
Apple's rapid growth over the past decade has been incredible, but growth like that is very unlikely to be repeated in the coming decade. It is quite possible that Apple continues to grow in the double digits, and there is speculation it could end up revolutionizing the market for television in the near future. If its current growth trends continue, there is a solid chance its market capitalization will eventually reach $1 trillion. However, many companies have faced equally bold predictions to come up far short of such lofty expectations.

SEE: Steve Jobs And The Apple Story

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