Every time Apple stock reaches a new high, journalists love to report on how the firm is now worth more InsertYourFavoriteBigThingHere. Even CNN recently got in on the act, reporting earlier this year that Apple was now worth more than all of Poland. What made the story stick that it seems, in a hand-wavy sort of way, to be plausible. Apple makes expensive, popular products that are sold around the world. Poland makes sausages. It could happen! Right?
Not even close. Bloggers (I’m not quite ready to let journalists off the hook for this one) can be forgiven for confusing two Very Large Numbers – Apple’s market cap (which recently approached $650 billion) and Poland’s nominal GDP, which stands at about $530 billion. The problem is, these numbers mean completely different things. Here’s why.
Let’s start with the meaning of market capitalization. Arithmetically, the market cap is very simple calculation: the number of shares a firm has issued, times the price each shares trades at in a stock exchange. Conceptually, it’s just slightly more complex: the market cap is the market’s best guess at Apple’s profits this year, plus next year, plus next year, and so on. That’s because the market cap is composed of shares of stock, and each stock represents ownership of a share of a firm’s current and future profits. Economists use a process called discounting to decrease the size of future profits to account for the fact that they are, well, in the future. They are uncertain and you can’t have them now. Put all this together and you have the conclusion that Apple’s profits from today until the end of time (or at least until we stop caring) are $650 billion. Incidentally, this is also the cost of buying Apple Inc.
What about GDP? To visualize Poland’s GDP, imagine a room containing all the products produced and sold by Poland in the year 2011. There’d be a big pile of sausages for sure – along with mountains of Ikea chairs, thousands of piles of wheat, and a cornucopia of amber, just to name a few choice specialties. For good measure, we also need to include intangible but completely real services that people purchase in Poland – millions of haircuts, plumber repair jobs (you needn’t visualize that one) and web designers typing away in front of their PC’s. Add it all up, and you’ve got Poland’s 2011 GDP.
So what’s the difference? The answer is time. Poland’s GDP is simply the value of the products and services produced in 2011. Apple’s GDP is the value of Apple’s profits this year, as well as next year and every year after that. It’s a bit like comparing you salary this year with a (discounted) version of all the salaries you will ever earn. The second number is going to be much, much larger.
Apple’s market cap is still an impressive figure – historic, even. But comparing it the value of Europe’s sixth largest economy is a bit overblown, even by our own inflated American standards. A more appropriate comparison would be to compare Poland’s annual GDP with Apple’s annual revenue – the letter being the total value of all products Apple sold in a given year. According to Apple’s most recent annual SEC report, that number is about $108 billion in 2011. That leaves Apple tied with Angola, Iraq, and Morocco. Oh well.
There’s always the iPhone 6!