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IPE Views: How big can an Apple grow?

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Joseph Mariathasan wonders what, if anything, can check the technology giant’s astonishing growth

Apple was valued at more than $770bn (€687bn) at its peak in February, making it by far the single-most valuable listed company on the planet. Despite its mammoth size, its chief executive, Tim Cook, announced that it could grow at a rate more akin to a start-up. But how large can a company grow? For some companies, there may be a clear upper limit – how many cans of sweetened fizzy drinks can Coca-Cola sell to a global population, with increasing worries over an epidemic of obesity-related afflictions such as diabetes?

That may be a reasonable question to ask of Coca-Cola, but can an analogous question be asked of Apple, with an enormous market, global distribution and a strong brand that, despite being enormous, still has a lot of growth in front of it? Will the limit to Apple’s growth be set when every person on earth has an iPhone?

Mega companies were clearly growth companies at an early stage of their lives to reach their gargantuan sizes. But, at what stage should mega-cap mega brands be seen as purely post-growth and value/dividend plays? Deciding when a company such as Apple has reached that position is unclear.

The limits to growth are clearly dependent on the business strategy a company chooses to follow. Apple is clearly not a one-trick pony. It is not just a hardware company like Dell, having built an ecosystem around a seamless integration of innovative products and applications way beyond production of commodity hardware. 

The limits to growth are further away for companies with three key characteristics. First, as famously outlined by Warren Buffet as the companies he favours, are those with an economic moat that protects them against competitors, with a well-known brand name, pricing power and a large portion of market demand. This can provide the ability to grow enormously, but, sometimes, disruptive technologies can overwhelm even the widest moat. Kodak is a classic example, where its domination of photography could not withstand the impact of digital technology. But Apple has become the ultimate consumer brand, with the ability to create interest in any new product or variation of an existing product by just adding the prefix ‘i’.

A second economic driver for growth also requires high-quality companies to be able to get better as they get bigger. Bigger does not always mean better, and the banking industry is the prime example of this. Citibank has a global footprint, but its value lies in having a few particularly strong local franchises in countries like Mexico.

The insurance industry is another case in point. Life insurance and property and casualty insurance are locally regulated and require capital to be domiciled in local markets, giving few benefits in size, beyond reducing the overall volatility of results. Reducing volatility benefits senior management but not shareholders who could gain equivalent diversification themselves. At the reinsurance level, however, size can bring benefits because of the nature of the business and the size of the transactions. For Apple, the iPhone ecosystem that has grown is a classic example of something that gets better the bigger it grows.

The third key characteristic that virtually all mega companies have is the ability to seek customers in the emerging markets.

Any constraints to its size are further away for Apple than for most other companies, as it has all the three factors for growth in spades. So what can be the limits to growth for Apple? “The biggest risk for most of the companies we own is anti-trust regulation in the US that will force them to split apart,” said one fund manager on his Apple weighting. “We don’t like that problem, but we certainly prefer it to others we might have!”

That is exactly what happened to the old AT&T, which once dominated the US telephone market and was forced to split up in 1982 into seven regional telephone companies – the ‘baby Bells’. That is unlikely to happen to Apple, given that it does not operate in oligopolistic markets and its innovations have attracted rapid and ferocious competition.

There appears to be no limits to size for Apple. But then, AT&T, at its height, employed 1m people. Apple employs less than one-tenth of that. A great investment for its shareholders but perhaps also a sign of the problems society faces with the new generation of mega companies that are great at producing returns for shareholders but lousy at producing jobs.

Joseph Mariathasan is a contributing editor at IPE

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    Asset region: Global.
    Size: EUR 80m.
    Closing date: 2019-03-29.

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