Let me first start by saying this is not a post about Apple’s products. While I’m certain Apple’s products are probably fantastic (I don’t own any), that’s not what interests me about Apple The Company or Apple The Stock.
What interests me is Apple as an investment. Today, it’s one of the largest companies (by market cap) traded on the NY stock exchange. With annual cash from operations exceeding $77 billion USD last year (2018), it’s safe to say that Apple Inc. is a titan of industry.
But it was not always thus. Apple was once a struggling computer maker that would occasionally have years where sales would decline and they’d lose money. This was back in 2000/2001, long before the iPhone ever existed. In those days, most of the company’s revenue came from selling PowerPC based Macintosh computers.
It’s fairly safe to say “the company was struggling” in the late 90’s and early ’00’s. At the time, Apple had difficulty competing with cheaper and more powerful Windows/Intel based computers. As a result, sales suffered and the stock price struggled too.
One day in particular was a terrible one for the stock — September 25, 2000. The shares opened at $3.77 and closed at $1.84 (all prices are split adjusted). Essentially the shares dropped by 50% in a single day and in the two years following it was possible to buy shares in Apple for less than a dollar per share. Today those same shares sell for over $166 per share.
Theoretically, if you’d invested $10,000 at $1 per share back then, the investment would be worth over $1.66 million today. That’s an impressive return in anyone’s book. Mine included.
I happen to remember September 25, 2000 very well, because my best friend decided to buy Apple shares the following day. I didn’t, and I remember distinctly the reason why (even though this was nearly 20 years ago) — I believed the company had no future.
Boy was I wrong! Predicting the future has never really been my speciality I guess… but I wish I’d bought those shares too.
To be fair, Apple earnings during that time period weren’t great (even during the profitable years). If you curious, you can go back and read Apple’s extremely old annual reports here.
I wasn’t the only one to think Apple wasn’t going to last much longer either — Michael Dell, CEO and founder of Dell computer was once quoted as saying to a crowd of journalists, that if he were made CEO of Apple, “I’d shut it down and give the money back to the shareholders.”
Learning From Apple
Apple is an interesting investing case to study. While everyone likes to point the finger at Steve Jobs for the giant success of the company, I don’t think that’s the entire story when it comes to investing. Part of the story, yes, but not all of it.
Like my Nintendo case study, Apple suffered through the ups and downs of a product cycle. They had hits and misses. Yet unlike Nintendo, Apple went on to earn incredible gains for investors. Nintendo was a big laggard by comparison.
Both are world class companies with a fervent fan base. Both are quality companies that produce very high quality products. Yet Apple was clearly the winner for investors.
So, what lessons can we learn from the Apple of 20 years ago, that might teach us to be better investors today?
Lesson 1. A Stable High-Margin Niche
One of Apple’s big secrets to success (I believe) was serving a high-margin niche that was fairly stable. For decades Apple sold Macintosh computers into the education and graphic artist markets, and earned very high net margins as a result. Typically around 10% or higher.
Initially, this niche was a nice competitive advantage for Apple because they served those customers particularly well, with easy-to-use computers. Back in the day when every computer user was still fighting with the occasional command prompts, Apple had a fully fleshed-out GUI. If you didn’t want to struggle with difficulties of using a PC, Apple was really the only other game in town.
Unlike the lower margin PC business however, Apple charged a premium for their computers. They still do today. And their customers are willing to pay it. Back in those early years, this stability from a loyal customer-base really helped Apple sustain the company during bad years.
During “good” years, those large margins also generated significant free cash flow for new investments (more on this later).
Lesson 2. Try A Lot Of Different Things
Maybe its a corporate culture thing, but Apple has this history of trying “different” things. Most of them weren’t hits. From digital cameras, to CD players, printers, the Newton PDA, and even a game console, Apple has tried out a lot of different products over the years! Apple kept trying to branch out into new categories that were not personal computers.
In other words — Apple management was continuously willing to keep trying new things. They had the cash flow and a stable customer base to afford to keep failing over and over again.
Eventually, they did generate some hits — starting with the iPod, and eventually the iPhone and iPad product lines. But it took many failures before they found fantastic success.
It’s fair to say that Apple creates plenty of flops, but my point is they keep trying to branch out. Over and over again.
It’s almost as if Apple management understood the business that sustained them in the past (personal computers) would not be the business that sustains the Apple of tomorrow.
Lesson 3. Market Reactions Are Meaningless
Probably one of the most important lessons investors can learn from Apple is that market reactions are truly meaningless in regards to long term performance. I mentioned one incident where Apple’s stock price dropped by 50% in the past, but there have multiple incidents where Apple’s stock price in the past has seen serious volatility.
For investors, this level of volatility is probably pretty hard to cope with, especially since the company didn’t pay dividends (at the time). Most investors don’t like to see a lot of volatility in their investments, and thus got spooked and sold during one of these volatile periods. But this provides an important investing lesson — Don’t get spooked by volatile market movements. The Markets truly do not know what’s coming any more than you do.
Day-to-day movements can be absolutely wild. This just reinforces the point that investors can’t really predict the future.
Lesson 4. Apple Wasn’t The Most Shareholder Friendly
Here’s something I found interesting during my research of Apple as a stock — Apple really wasn’t a very shareholder friendly company. For one, they didn’t pay dividends for decades. They also offered very lucrative option and share packages to executives that seriously diluted the shares outstanding.
Only recently has Apple started buying back stock and began to rectify the unusually high levels of dilution. For shareholders, dilution means you own a smaller and smaller piece of the company every year despite continuing to hold the same number of shares. There was significant dilution at Apple as executives were richly rewarded.
The company even had a stock option backdating scandal that seems to indicate someone was playing fast and loose with stock option grants at Apple.
Despite the lack of shareholder friendly policies such as share buybacks and dividends, long term investors would still have done ‘OK’ in Apple stock. Nowadays (of course) the company buys back a significant number of shares AND pays a dividend. It’s far more shareholder friendly than it used to be.
The Lesson Learned here? Don’t give up on an investment just because of poor shareholder policies. If the business is good enough, it can trump any nonsense going on in the board room.
Lesson 5. More Than Just One CEO
While Steve Jobs is often credited for much of the success of Apple Inc., we shouldn’t forget that a company like Apple is more than just one CEO.
Following Steve Job’s death, Tim Cook took the reins and the share price has since tripled. Investors have done very well without Steve Jobs over the last few years.
While the cult of personality surrounding Jobs was impressive, it’s an important lesson for investors to remember that a company isn’t just one person acting alone. There are multitudes of people that create, engineer, and market products like the iPhone. Jobs didn’t do it alone.
While some people might argue that Apple’s products have been less innovative in recent years, profitability certainly wasn’t hurt by his passing. Apple has continued to prosper because they had a proper succession plan in place, plenty of money being invested in R & D, and of course many skilled individuals ready to design the next Apple product….
Which will no doubt sell extremely well.
Apple is an interesting case to study, isn’t it? The company has had such a long and storied path to success.
I find that success is most obvious in hindsight, but even the largest companies had to start somewhere (as a small company). It’s what companies do when they’re smallest that I think investors can learn the most from. How did they survive? What moves did they make to outfox the competition? And most importantly — can it be sustained into the future?
While I didn’t buy shares in Apple 20 years ago, I don’t kick myself and regret the move. I’ve learned a lot since then, and I’m still not certain I could have foretold what a smashing success Apple would become.
Instead, I try to learn what I can from the mistake. After all, it’s not a failure, just an unfinished success. 😉