Another Reason Not to Read the NYT: Apple Confronts the Law of Large Numbers


(Or, for that matter, Daring Fireball, because parroting crap does not journalism make.)

In yesterday’s Linked List, John Gruber quotes the New York Times which makes this nonsense comparison:

If Apple’s share price grew even 20 percent a year for the next decade, which is far below its current blistering pace, its $500 billion market capitalization would be more than $3 trillion by 2022. That is bigger than the 2011 gross domestic product of France or Brazil.

Put another way, to increase its revenue by 20 percent, Apple has to generate additional sales of more than $9 billion in its next fourth quarter. A company with only $1 billion in sales has to come up with just another $200 million.

It is clear that neither the original author, James B. Stewart in an op-ed piece under the subhead of “Common Sense,” nor John Gruber understands what the three distinct and separate numbers referenced (share price/market capitalization, GDP, and revenue) have to do with each other: nothing.

Market value is merely share price times the number of outstanding shares, so the market value and share price are one number as far as I’m concerned. Share price is based solely on investor emotion. Even those who make decisions based on numbers eventually have to get to some point where their opinion determines what they will buy or sell a share for. After initial issue of that share, there is no real anything which determines share price; its value is based totally on emotion. And so market share is a big but totally meaningless number.1

Gross domestic product, on the other hand, is “the market value of all officially recognized final goods and services produced within a country in a given period.”2 It, unlike market value, is a very real and meaningful number. It’s what people are paying each and every day with their hard-earned money to buy the stuff that a country makes. Real transactions occur to produce a GDP. Real money changes hands to give products value, whereas market share is merely emotion times the number of outstanding shares.

Yes, these numbers are very big numbers and so it seems appropriate to compare big numbers to other big numbers. But I may as well compare Apple’s market value to the weight of Stone Mountain, Georgia, in tons.3 It’s a meaningless comparison.

Finally, revenue, though it seems to be coupled to share price, is not in actuality tied to share price at all. And that’s because one is driven by emotion of investors and the other is driven by real sales. Again, we have imagination vs. reality. A good example of this inexplicable relationship is in Ford’s share price vs. its earnings per share. For several quarters in the past few years, it lost money or just barely broke even, and yet the share price soared. Now it’s on the upswing, and the share price is languishing in mediocre territory.4 Clearly we are comparing emotion versus reality.

Linking share price to revenue with the comparison of a for-example-only 20% share price growth to 20% revenue growth is useless. Again, it’s a nonsense comparison, and you’d be just as well off comparing Apple’s annual share price growth to the annual rate of growth of a teenager. It just doesn’t make any sense.

In the overall context off the rest of the article, the comparison still doesn’t make any sense, but at least there are other reasonable numbers to think about. But Gruber does the rest of the world a disservice by highlighting the most irrelevant and useless portion of the article.

1 And why, if it’s such an amazingly arbitrary system, do I participate? Because in general, investors have tended to be about 10% happier per year for the last 100 years or so.

2 Wikipedia. Is using Wikipedia as a reference good or bad? I don’t know, but it is a concise definition, and I liked the wording of it.

3 Wikipedia again.

4 YCharts.

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