By Philip Elmer-DeWitt
August 5, 2010

The law of large numbers says it must. Not anytime soon, says Robert Paul Leitao.

The law of large numbers as applied to finance (as opposed to flipping a coin) says that as a company grows, its chances of sustaining large percentage revenue gains diminish. That’s because an expanding enterprise must grow faster and faster just to maintain a constant percentage growth rate. Indeed, a company growing 30% to 50% a year will soon be larger than the entire economy.

But that’s just what Apple (AAPL) has been doing. Over the past 11 quarters its revenue has grown an average of 37.5% year over year and its earnings an average of 68.5%. Moreover, it doesn’t appear to be slowing down. According the Thomson Financial, the Street is looking for another blowout quarter in September, with sales up 86% and EPS up 42%.

Common sense tells the casual observer that this can’t go on. But common sense would be wrong, writes Robert Paul Leitao — a.k.a. DawnTreader — a regular at the Mac Observer’s Apple Finance Board and one of the more thoughtful commentators on this site. In an entry on his Posts at Eventide blog, he outlines the reasons why the law of large numbers does not apply to Apple, at least at this point in time.

“In the June quarter close to 50% of Apple’s revenue was derived from products that did not exist in the market just over three years ago.,” he writes. “In the September and December quarters, well over 50% of Apple’s reported revenue will be derived from iPhone and iPad sales. At the moment there’s no practical limit to the size of the market for these two products.”

Leitao goes on to examine each business unit one at a time:

  • The Mac: sales up 33% over the past three quarters
  • The iPhone: sales up 90% last quarter
  • Retail stores: revenue up 73% and foot traffic up 57% last quarter
  • The iPad: contributing nearly 14% to Apple’s revenue in its first quarter
  • Even the iPod, which saw an 8% decline in unit sales last quarter, managed to deliver 4% revenue gains thanks to a 48% increase in iPod touch sales.

Leitao is looking for Apple to report earnings of $4.30 a share on sales of $20 billion in its fiscal fourth quarter, considerably higher than the Street’s consensus of $3.95 and $18.36 billion. Leitao tends to be more bullish than the Street. He also tends to be right.

You can read his Apple and The Law of Large Numbers post here.

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[Follow Philip Elmer-DeWitt on Twitter @philiped]

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