Breaking the Law of Large Numbers

Six months after Steve Jobs' death in 2011 Apple stock had risen by 50%. The company was valued at $535 billion.

It was around that time that the law of large numbers became a popular term in the financial news. The "law" makes intuitive sense:

any company growing at 20% per year, or 4x-5x the overall U.S. economy, will someday see its growth slow—otherwise it would grow larger than world GDP...

This real world limit on the economy and revenue potential is called in mathematics the “law of large numbers”, and is best applied when projections of future compounding cannot be sustained because they are too high, too far out in the future, or some combination of both.

In 2012 Apple had reached a hard-to-justify valuation of $535 billion, and it was likely that slower future growth in earnings would result in slow appreciation of the stock price. Besides, look what happened to Microsoft. At the peak of the dot-com bubble ten years earlier it too reached $500 billion only to see its valuation cut in half shortly thereafter.

Today's WSJ headline: Apple Becomes First U.S. Company to Reach $3 Trillion Market Value

Apple shares crossed the milestone when they topped $182.856 Monday. The share price has more than tripled since the pandemic lows of March 2020, adding around $2 trillion in market capitalization.

The analysts can cite the reasons for Apple's growth since 2012: the iPhone remains popular; the growth in services is strong; there's the promise of augmented reality and an Apple car. Exactly how it all works out to a $3 trillion market capitalization is $2.999999 trillion above my paygrade.

The law of large numbers will eventually apply to AAPL, but it doesn't say when.