How Big Is Too Big for Apple?

apple-logoApple is America’s most valuable company, and the contest isn’t even close. Its market capitalization—the total value of all of its stock—is around $725 billion, about twice as much as the next largest companies such as Exxon Mobil, Google, and Microsoft. It grew so large by providing investors a return of almost 2,100% over the past 10 years, which is an average return of 36% per year. But as is often stated when it comes to investing, “past performance does not predict future results.” So will Apple stock be able to continue producing such generous returns for investors?

In theory there’s no reason why it can’t. It’s often difficult for large companies to maintain fast growth rates because their high market share mean fewer opportunities to take sales away from competitors. But the market share for Apple’s flagship product, the iPhone, is only about 20%. Such a number suggests that there’s at least a possibility of Apple continuing its dramatic growth even if other products such as the iPad, the recently released Apple Watch, or a rumored Apple electric car aren’t able to replicate the iPhone’s success.

Historically, however, companies have struggled to repeat their stock market success after they earned the title of America’s most valuable firm. Calculations by The Economist show that the four other companies that have achieved this distinction since the early 1980s (IBM, Exxon Mobil, General Electric, and Microsoft) on average had cumulative returns of 1,282% in the 10-year period before reaching the top spot, but an average return of only 125% in the subsequent 10 years.

Part of this phenomenon likely has a statistical explanation: just like athletes who have had outstanding rookie seasons may often seem to suffer “sophomore slumps” in their second years, a company that’s done so extraordinary well that it’s become the most valuable American company is unlikely to be able to maintain the same level of success. But there may be other explanations as well. It might be more difficult for a company’s executives to manage a massive organization than a smaller one, for example.

Investors shouldn’t automatically assume that Apple won’t at least partially repeat its past success. After all, Apple first became the most valuable stock in 2011, and it’s largely been able to build on its previous success since then. But if it’s able to continue outperforming the broader stock market, it would be defying the historical odds.