One of the most common reasons cited for Apple's extremely conservative valuation is the law of large numbers.  This discussion arises because a quantitative measure (Apple's market cap) appears to be at an extreme value and is far more likely to revert to the mean rather than move to a further extreme.  Apple is the most valuable publicly traded company in the world.  Skeptics ask “How much higher can the stock go?”

The answer depends, of course, on our expectations for Apple's future earnings.  In other words, citing the law of large numbers in reference to market cap doesn't really mean much if we don't look further.  It is really just another way of observing that current market expectations are that not only will Apple's business not grow, but will see decline in the years to come.

If we turn our attention to quantitative measures of Apple's business and growth potential we see a completely different story.  iPhone, iPad, and MacBooks make up the vast majority of their business.  I will consider each in turn.

I believe that over the very long term markets are rational and arrive at fair value for financial assets, however I am not a believer in the efficient-market hypothesis (which states that market value always reflects all publicly available information in a rational manner).  The path markets take to arrive at a fair value is neither smooth nor efficient.  There is lots of noise and often irrational excess.  As John Maynard Keynes famously said, “Markets can stay irrational longer than you can stay solvent.”

Apple's stock has been no stranger to apparently irrational and wild swings in market sentiment over the course of the last decade.  During it's 1000% climb the stock experienced several declines of 40%, including one of about 60% during the financial crisis of 2008-2009.  These declines happened despite no apparent underlying changes for the worse in Apple's business, which always grew quicker than expected.