Does the bear case against Apple make any sense at all?

by
Philip Elmer-DeWitt

@FortuneMagazine

November 1, 2015, 12:02 PM EDT

At least three dozen Apple analysts have told their clients to expect the company’s shares to be worth more a year from now than they are today. (See spreadsheet, below). The Street’s average 12-month price target for Apple is roughly $150. The highest target, set by Brian White at Drexel Hamilton, is $200. Right behind him is Piper Jaffray’s Gene Munster at $179.

Two analysts beg to differ.

Colin Gillis at BGC Partners, a spin-off of Cantor Fitzgerald, believes Apple AAPL will fall to $115 within a year. He’s advising his clients to hold on to their shares and not to buy any more.

Adnaan Ahmad, the top Apple analyst at Hamburg’s Berenberg Bank, believes the stock will fall to $85 a share and is advising his clients to sell.

Gillis and Ahmad are outliers, as a glance at the spreadsheet below will tell you.

But I’d like to understand their point of view. Because with the stock trading at $119.50 a share—$4.50 more than Gillis’ price target and $80.50 less than White’s—the bear case seems to be carrying the day.

Gillis’ most recent note tells a good news/bad news story that makes a certain amount of sense. iPhone sales are up, especially in China, but iPhone growth is slowing. Which is why, Gillis says, the stock has been stalled for the past three months. His price target is lower than, say, Munsters’, because Gillis values Apple at 12 times projected earnings while Munster is using a multiple of 19.

Ahmad’s most recent effort, “Apple: ticking time bomb,” makes no sense at all. At least to me. Except for the 10X multiple Ahmad uses to get to $85 a share, his note to clients is virtually analysis-free. What he offers instead are assertions. Among them (I quote):

—[Apple] is a one-product company, and this product has run out of steam or will do very soon.

—The Watch has been a disaster relative to lofty expectations.

—Music, Pay and TV did not move the needle.

—The iPad Pro at $1,000 with “pencil” and keyboard is just not going to make a difference, in our view.

“It is incredible how myopic the market is being with respect to Apple,” Ahmad says near the top of the note, apparently frustrated that the stock hasn’t fallen below $92 in the past 12 months. Seven paragraphs later, he arrives at this:

“For Apple, Mr Market is questioning volumes and growth at the moment. That is why the momentum only has left the building. The issue for value investors is that when mix and ASP start being questioned, then it is natural to bring in gross margin developments. Like Nokia in the 2000s, Apple will probably cut opex, but like Nokia’s stock, Mr Market will not be fooled. That is when the value guys will leave the building and Apple’s stock will be well and truly crushed as the ‘consumer electronics’ label will replace ecosystem/stickiness/recurring revenues.”

I’ve read that paragraph a dozen times, and it doesn’t make any more sense the 12th time than it did the first.

“We have ranted on here a bit,” Ahmad concludes, “but as we have said before, it is about the tech law of large numbers, which is why the bulls are hanging onto the iCar.”

Ah. I should have known. That pesky law of large numbers. This may be what passes for analysis at Joh. Berenberg, Gossler & Co., the world’s fifth oldest bank (in partnership since 1590).

But if this is where Mr. Market is getting his Apple advice, we’re all in trouble.

Below: The current price targets, as up-to-date and accurate as I can make them. Corrections appreciated.

Follow Philip Elmer-DeWitt on Twitter at @philiped. Read his Apple AAPL coverage at fortune.com/ped or subscribe via his RSS feed. You might also want to subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.

Look. Apple doesn’t obey the ‘law of large numbers.’ No company does.

by
Philip Elmer-DeWitt

@FortuneMagazine

October 24, 2015, 11:42 AM EDT

The market’s reaction Friday to the latest earnings results from Google, Amazon and Microsoft (read Fortune’s coverage here, here and here) got reader Carl Lambert—who posts here as RadarTheKat—thinking about the “law of large numbers,” one of the most abused phrases in business journalism. (See below.)

“Here’s the article I wish someone would write,” he says. And then he proceeded to write it:

“Among the arguments why Apple shares cannot outperform the market or its peers has been the oft repeated law of large numbers; the claim that Apple is too big to meaningfully grow and that its market cap, at nearly $680 billion, is so big that there aren’t enough investment dollars to move the needle.

“But last night the market unwittingly provided an irrefutable counter argument by taking the combined market caps of Google, Amazon and Microsoft to nearly $1.2 trillion. The market seems to have no trouble adding $70 billion to these three companies, whose combined profits are a fraction of Apple’s, but won’t allow the same for a single company.

“It was Microsoft’s year 2000 valuation, north of $600 billion at the peak of the dotcom bubble and stagnant for the decade thereafter, that has since been used as the poster child for what happens to the company with the world’s highest market cap. The street is convinced that will be Apple’s fate.

“What the market doesn’t seem to understand is that vertically integrated Apple, in terms of the profits it generates and markets it addresses, is equivalent to the entire PC industry of the 1990s, including Microsoft, Sony, Toshiba, IBM’s PC division, Compaq, HP, and all the other PC makers. Adjusted for inflation, Microsoft’s year 2000 valuation alone would today be $850 billion, against Apple’s current $680 billion. How much higher when you add in all the PC makers from 2000?

“Apple’s market cap, given the scope of its business, and adjusted for inflation, is very conservative. As usual, the market is wrong.”

I last wrote about the so-called “law of large numbers” a few years ago when I caught James B. Stewart, a Pulitzer-prize winning professor of business journalism at Columbia University, invoking it in the New York Times as a pseudo-mathematical explanation of why Apple, as of February 2012, had peaked. At the time I wrote:

“For the record, the law of large numbers—once shortened to “LOL numbers” (as in ‘laugh out loud’) by a wag in our comment stream, was first formulated in the 16th century and proven by Jacob Bernoulli in 1713. It states that the probability of an experiment—the average roll of a die, say—achieving the expected result increases the more times the experiment is performed. It has absolutely nothing to do with how big a company has grown.”

There ought to be a phrase for the self-evident truth that any company that’s growing faster than the economy as a whole can’t do so forever because eventually it would have to become larger than the economy it’s part of. But the law of large numbers is not it. And Apple may turn out not to be its poster child.

Follow Philip Elmer-DeWitt on Twitter at @philiped. Read his Apple AAPL coverage at fortune.com/ped or subscribe via his RSS feed. You might also want to subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.

Want the Full Story?