Steve Jobs announced his retirement on Wednesday, as his declining health has made it impossible for him to continue as Apple's (AAPL) CEO. We wish the best for Jobs and his family, and hope that he makes a full recovery.
Still, Jobs’ departure raises a very uncomfortable question for Apple: How does a company that owes so much of its success to the vision of one man cope with his absence? Apple's stock movement indicates traders are wondering the same thing. Apple is a company I’ve considered recommending or buying for clients for years.
In every measurable respect, it is a company worth owning. It has been in the cutting edge of consumer electronics since the rollout of the iPod, and has continued that dominance with the successful launch of the iPhone. It created a new market where none previously existed -- for tablet computers -- with the iPad.
The company is wildly profitable—it has profit margins of 24%, and its return on equity is an eye-popping 42%. Its earnings are growing at over 100% per year. And shockingly, the company is cheap. It trades at a forward P/E ratio of less than 12, has no debt, and 8% of the stock price is cold, hard cash.
Yet despite all of this, I couldn’t get comfortable with the company because of the unquantifiable risk that something might happen to Steve Jobs. How would Apple perform without Jobs at the helm? Frankly, I don’t have an answer for that question. And I couldn’t put money at risk with that kind of elephant in the room.
History is full of stories of successful companies that have prospered after the departure of an iconic founder. Wal-Mart (WMT), for example, has done just fine since the passing of Sam Walton. Going further back in time, John D. Rockefeller’s oil companies survived his death and thrived to the point of trust-busting, living on today as Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP).
The difference, of course, is that innovation is far more important in a modern technology company than in a discount retailer or oil company. Jobs’ successors will no doubt do a fine job of selling iPods, iPhone, and iPads. The question is: What next? Without Jobs to think up the next great idea, is the rest of the Apple management team up to the task?
Again, I don’t have a satisfactory answer to this question. This is not the first time investors have pondered the “Jobs question.” In January, the iconic CEO took a leave of absence from Apple. Shares dropped -8% in late January to $325 as a result. Now the stock is up 15% from that low to about $375. Will the shares shrug off this news again? Maybe.
In the meantime, Apple investors are now left to ponder the following scenarios:
- Given the stock’s cheap valuation, investors already long ago factored the possibility of Jobs’ retirement into prices. Apple is thus fairly priced.
- Jobs’ recent contributions have been overstated due to his cult of personality in the industry, and his lieutenants will get along just fine without him. In this case, Apple is a screaming buy at these prices.
- The intangible benefits of Jobs’ leadership—i.e. his vision and creativity—is even more valuable than investors currently appreciate. If this is the case, Apple faces a very uncertain future.
Given the unknowns, I would hope for scenario #2, but prudence would make me fear for Scenario 3. I have to recommend avoiding Apple for now. There are enough uncertainties in this market already.
In Jobs’ retirement, the company, the industry, and the world at large are losing a truly visionary giant. Our best wishes for his speedy recovery.