In a single word: yes. Apple is still a phenomenal investment opportunity.
Even though it’s a popular investment, it’s still not usually a good idea to invest your hard-earned money without first having a thorough understanding of the company you are investing in. So let’s dive in.
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The company today
Apple is a multinational technology company specialising in consumer electronics, online services, and computer hardware and software.
At this time, Apple is the biggest company by market capitalisation with a valuation of US$ 2.48 Trillion. To put this into perspective, that is US$2,480,000,000,000 or about 42 days of the United States GDP.
But, how did Apple become the world’s most valuable company?
If I were asked to sum it up in one sentence, it would be “By being obsessive about creating the best possible consumer experience”, But first, let’s take a step back and see how it all began.
How it all began
The company was founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne as a business partnership. Its first mission was to sell the Apple I computer, not a complete computer but a base kit consisting of RAM (random access memory), a CPU(central processing unit), and video clips.
In 1977, after Wayne´s departure, the company was incorporated by Jobs and Wozniak as Apple Inc. At this point, the company needed some serious funding; that is when an angel appeared. Angel investor Mike Markkula invested much needed US$ 250,000 in the company (equivalent to over US$ 1 million today).
Also, in 1977, the Apple II computer was introduced at the first edition of the West Coast Computer Faire. However, the big success for the Apple II came in 1979, when it was elected to be the desktop platform for Visicalc, the first spreadsheet program for personal computers. This opened a whole new market to the company for business and home users.
By 1980, Steve Jobs was certain that future computers would require a graphic interface for people to interact with the machines. This would eliminate the need to learn to program for using a computer and open an even bigger market that VisiCalcVisiCalc created. This is why the GUI (Graphic User Interface) started developing the Apple Lisa computer (named Lisa after Jobs’ first daughter) under Job´s direct supervision.
As a result of internal fights, Jobs was expelled from the Lisa team. At this point, Jobs moved to the Macintosh project, a project created by Steve Wozniak and Jeff Raskin to develop a low-cost computer. The Macintosh team was able to develop a lower cost and more efficient graphical system compared to the one used by Lisa. In 1983, Lisa came to the market as the first computer with a graphic interface, but it didn’t succeed as a result of its high price: US$ 9,995 (around US$ 27,000 in today´s terms).
Initial Public Offer
In 1980, Apple Inc. went public, raising over US$ 100 million (4.6 million shares at $22 per share). The stock closed $29 per share on the IPO day and had a market cap of $1.78 billion.
It is worth noting that since its initial public offer, Apple stock has gone through 5 stock splits, and as a result, the IPO price of $22 would now be equivalent to 39 cents.
The Macintosh and the Jobs Departure
In 1984, the world got to know the first personal computer that did not require programming. During the first months since its introduction, the Macintosh was a commercial success. However, only a few months after its initial release, Macintosh sales tanked. This situation created a conflict between Jobs and CEO John Skulley, who Jobs himself has previously hired. As a result, Skulley removed Jobs from being the manager of the Macintosh division.
Steve Jobs would not just sit still after being expelled from the Macintosh team; instead, he organized a coup to overthrow John Skulley. The coup was not successful, and Skulley could neutralize Jobs by stripping him of all operational duties. Jobs resigned in 1985.
Without Jobs, the company did not experience much success, and Microsoft kept gaining market share with Windows, selling software for inexpensive personal computers.
The Jobs comeback
In 1997, Apple purchased Next, a software company founded by Jobs and other Apple´s ex-employees, when Jobs resigned in 1985. The objective of the purchase was mainly bringing back Jobs to the company, first as an advisor. However, only 5 months after Jobs returned to the company as an advisor, previous CEO Gil Amelio was ousted due to the poor stock performance. As a result, jobs was appointed as interim CEO.
In 1998, Apple introduced the iMac, which sold almost 800,000 units in 5 months.
Also, in 1998, Apple started its bold move into the music industry, developers of the mp3 player and music library software moved to Apple.
In early 2001 Apple opened its first official retail stores in California and Virginia. Later that year, the company released iPod digital music player. The product experienced enormous success and sold over 100 million units during its first six years. Then in 2003, the iTunes store was launched, offering music downloads at US$ 0.99 per song and full integration with the iPod. The iTunes store soon became the market leader in online music sales. Two years later, it became the world´s largest music retailer.
In 2006 the company launched the MacBook Pro and the iMac; both were the first Apple computers based on intel core duo processors.
At this point, the company gained the investors and consumer´s trust; between 2003 and 2006, the company stock’s company value multiplied by a factor of 13x from a (split-adjusted) price of $6 in 2003 to $80 in 2006.
Focus on Mobile Devices
On its keynote speech at the Macworld expo 2007, Jobs announced that the company would be dropping the “computer” word from its name, changing the company name from “Apple Computer, Inc.” to “Apple Inc.”. This apparently meaningless detail carried great implications; it signalled the change in its focus from computers to consumer electronics. It was during this same event that Jobs presented the iPhone and Apple TV.
The iPhone success was enormous; 270,000 units were sold during the first 30 hours of being available.
In 2010 Apple unveiled the iPad, a tablet-like media device running a similar operating system as the iPhone but with a much larger screen.
In October 2010, Apple stock hit an all-time high of $300 (which would be $43 when adjusted for stock splits in today´s terms).
Apple after Jobs
In 2011, Steve Jobs passed away due to pancreatic cancer, which he has battled over many years. Months before his death, Jobs delegated his day to day functions to Chief Operating Officer Tim Cook. Later cook became Apple´s new CEO.
After Jobs death, there were serious concerns about the ability of the company to keep innovating at the fast pace that Jobs had previously lead. However, the company has continued thriving under Cook´s direction. In the ten years since Steve Jobs passed (from October 2011 until September 2021), the company stock has multiplied ten-fold from a (split-adjusted) price of $ 15 to $150.
The Investment Opportunity
By now, we have a good grasp of what has made the company so valuable at this time. But the question remains: Is Apple a good investment at its current price?
When we look at an investment opportunity, it is good to understand where the company comes from. But the reason for doing this is to get an idea of where the company is headed to.
It is not a good idea to buy a company stock because it has a great past. Our investment will pay off (or will not) depending on the company’s future performance and the price we pay for it.
So, let’s say you believe a company has a great future. Does that make that company´s stock a good investment? Yes, but only if the price is right.
Let´s say, would you consider investing in a (legal) money printing? We would need more information to decide on that. Imagine that this machine prints $1,000 daily. For sure that would be something good to have if you received it as a gift. But, if you were offered to buy it?
First thing, we would need to know if that machine has a warranty for example, what will happen if it prints money for 200 days and then breaks? We would also like to know if it will always print $1,000 per day or expect to increase the amount it prints.
Now, let’s assume that the machine has a 30-year warranty and it will print $1,000 every day. Will it be a good investment at the cost of $10 million? Many investors may consider passing on this opportunity. Why? It would take around 27 years to pay back its initial investment. Not that attractive, right?
Now assume that the price is $ 1 Million; now, it will only take about 2 years and 9 months to get paid back. So now that investment sounds more attractive.
, Similarly, as in the money printing example, we should consider if a company stock will deliver a good return on the investment.
At this point (September 2021), Apple´s stock price is $148, and the company’s company’s earnings per share are $5.11. This means that each stock has produced $5.11 in earnings for its owner during the last twelve months. So, is it a good deal to pay the equivalent of 29 times the yearly earnings for a stock?
The answer depends on whether you expect the company earnings to keep on growing or not. If you expect the company earnings to experience no growth at all, then the prospect of paying 29 times the yearly earnings (meaning you will get your investment repaid in 29 years) may not sound that attractive. But if you expect the earnings to keep on growing (as they have over the last decades), then we may be looking at a good investment.
Would you be comfortable investing your inheritance cash on a stock costing that much? The choice to part with meaningful cash is yours, and its a difficult one.
Now, how can we adjust our expectations about future growth for a company? Past growth is for sure something to take into account. If the company has managed to multiply its earnings time after time, over and over again, then we should consider the possibility that it can actually continue doing this.
But only looking at the past is not good enough if we are looking to invest our hard-earned money. We need to understand how the company stands among its competitors, does it has a sustainable competitive advantage? What does a sustainable competitive advantage mean anyway?
Consider what happens when a business starts making a lot of money, earnings go through the roof since it has just created a market that didn´t exist before, so it has all the market for itself.
Will everybody else look at it and clap their hands? No, copycats will start popping up all around trying to get a piece of the cake. These copycats will pressure the original company earnings on several fronts:
- Sales volume may go down (since some will go to the competition)
- Prices will go down (since the other companies will be willing to compete offering lower prices.
- Supplies used in the production of the goods will increase their prices, since the demand for these supplies will go up.
So, taking these three factors into account, an investor needs to understand the competitive landscape of the company she is considering investing in and how its target company will defend itself on these three fronts.
The only way for a very profitable company to continue beings is to have a competitive advantage. Some protective shield that will mitigate (or even neutralize) these competitive threats.
So, in what situation is Apple Inc. when compared to its competitors? Will, the company, be able to keep on delivering outstanding financial results, or will it lose its market to the competition.
Over decades the company has been able to differentiate its products from the competition clearly. As a result, Apple has consistently been able to deliver products that outstand from its competition. In addition, it has converted its consumers into brand ambassadors that constantly talk positively about their experience with the Apple products. Now that is a sustainable advantage.
You know that your company is doing something right when most competitors try to copy your company’s steps. And this is what has been happening for years for Apple.
Let’s talk about dividends
At this time, dividends are not the hottest part of the Apple story; dividend yield stands at a modest 0.59%. This means that for every hundred dollars invested in Apple stock, you would have received 59 cents during the last twelve months.
For some types of investors, that kind of dividends may not seem attractive. But there is a much brighter side to that meagre dividend: Growth.
Apple’s may use company earnings for one of two things:
- Paying back to investors
- Reinvesting in order to make the business grow
First, during the last twelve months, the earnings per share have been $5.11 while the dividends per share have only been $0.88. That means that $4.23 per share means that 83% of the company earnings are being reinvested. Second, this reinvestment means that the company keeps focusing on pursuing new opportunities.
Taking into account:
- The company´s impressive and consistent track record of over-delivering on both consumer products and on financial results
- The level of reinvestment that keeps on promising strong growth
- The company´s strong competitive advantage based on their strong brand positioning.
We consider that Apple Inc. stock is a solid investment that will keep on delivering for many decades to come.
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