The hardest part of valuing a company 🔮🧮

Ambitious companies will make unforeseeable changes as they capitalize on a future that has yet to be imagined 🧐

In May 2012, hedge fund manager David Einhorn predicted Apple was on its way to becoming a $1 trillion company.

At the time, Apple was already the world’s largest publicly traded company with a market cap just north of $500 billion. The idea of it doubling in value was understandably hard for people to get their heads around.

Einhorn told the Ira Sohn Conference that there was no rule preventing a company from reaching a $1 trillion market cap. To support his projection, he argued that it was a mistake to say Apple was a hardware company when so much of its value was driven by its sticky software, including iOS, iTunes, iCloud, and the App Store.

“I believe Apple is a software company that monetizes its value from repeated sales of high-margin hardware,” Einhorn said.

In August that year, Apple’s market cap reached $623 billion, making it the largest publicly traded company in history. Six years later, it became the first $1 trillion company. It’s worth over $4 trillion now.

This is David Einhorn at the 2002 Ira Sohn Conference. He came back ten years later to predict Apple was headed to $1 trillion. (Screengrab from YouTube)

Credit to Einhorn for seeing what few imagined. (He reportedly earned $1 billion for investors.) Apple’s hardware continues to drive gross profits while commanding an impressively high gross profit margin. (Though the gross profit margin on Apple’s services is much higher.)

That said, I’m pretty sure he didn’t predict all of the markets Apple would enter, which today includes watches, earbuds, and smart speakers.

I similarly doubt that Amazon’s early investors imagined a scenario where the company would become a cloud-computing behemoth, or that Google’s early employees could have predicted it’d dominate mobile operating systems.

This speaks to the impossibly hard, extremely consequential part of valuing a company: predicting whether a company will adapt to a business environment that’s yet to be known and capitalize on opportunities that haven’t yet been invented.