Apple ($AAPL) is such an outlier that it’s smashing rules and norms for almost everything – especially in the size department. It’s wreaking havoc with the cap-weighted index makers (S&P, Nasdaq 100) who cannot keep up with the stock’s outsized influence on the basket as a whole.
Today’s New York Times looks at this phenomenon from the standpoint of the Law of Large Numbers, here’s James Stewart:
Here is the rub: Apple is so big, it’s running up against the law of large numbers.
Also known as the golden theorem, with a proof attributed to the 17th-century Swiss mathematician Jacob Bernoulli, the law states that a variable will revert to a mean over a large sample of results. In the case of the largest companies, it suggests that high earnings growth and a rapid rise in share price will slow as those companies grow ever larger.
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 $1 billion in sales has to come up with just another $200 million.
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