Plenty of recent headlines have suggested that the price of Apple (AAPL) stock will fall in the coming weeks and months as investors digest the resignation of CEO and Apple co-founder Steve Jobs. The conventional wisdom suggests that the best case scenario for Apple shareholders would be that Jobs has built a truly enduring culture at Apple that has reached critical mass, and the billion-dollar profits will continue to flow into Apple without a hitch under new management led by CEO Tim Cook. Of course, some investors, all too aware of how much value a uniquely brilliant leader can generate, fear that Apple’s performance over the coming years will mirror the languishing returns Microsoft (MSFT) shareholders have known all too well during the Steve Ballmer era.
The first thing we need to acknowledge is that Jobs brought a disciplined, innovative, outside-the-box approach to running Apple that cannot be duplicated, so it would be unrealistic to expect Cook to be Jobs 2.0. I think that the door is open for Apple to have a wildly successful and innovative future (I can’t think of a large-cap tech company with better growth potential), but I don’t think you should have the expectation that it will break new ground in the way that it did during Jobs’ tenure as CEO.
Bill Gates didn’t compliment too many rising stars in the nascent computer industry during the 1980s, but even he found time to show Jobs some love. Here’s what he had to say about Jobs’ Macintosh computer:
Well, to create a new standard, it takes something that’s not just a little bit different, it takes something that’s really new, and really captures people’s imagination, and the Macintosh, of all the machines I have ever seen, is the only one that meets that standard.
Jobs is phenomenally brilliant, and there shouldn’t be much argument that Apple is a stronger company with Jobs than it is without him, and fortunately for Apple shareholders, Jobs will still exert influence over the company’s future in his position as chairman.
But investors should not expect a repeat performance of 2000-10 in the coming decade. Apple was trading at $6-7 at the start of the millennium, and now it’s at around $380. That’s a 54-fold increase. For Apple to do that over the next decade, it would have to trade at $20,520 (unless there’s a buyback or dividend policy to offset this). Apple increased earnings per share from $0.17 in 2002 to $25.26 on the most recent trailing 12-month basis. That’s a 148-fold increase. If Apple was to increase its earnings at the same rate going forward, it would have to churn out $3,738.48 per share a decade from now. Apple had one of the greatest decade runs from 2000-10 in the history of American capitalism, and it would be incredibly unrealistic for investors to expect that kind of growth going forward.
But I assure you Apple shareholders, it’s not going to be gloom, death, disease, pestilence, and bankruptcy in your future. Your expectation for Apple going forward ought to be outperformance relative to the S&P 500. With Apple currently trading at around the 15x earnings mark, and growth rates expected to rise by 20% in the next few years, you’re in a great position to reap above-average, even great, returns. When you own a company that has over $70 billion in the bank, the world should be your oyster.
The first bit of good news is that Apple’s current line-up of products ought to continue to be a cash cow at least in the medium-term, so the billion-dollar profits will continue to roll in. And Apple’s first priority, of course, will be to continue the legacy of innovation that drove the company to such spectacular growth. This past decade, Apple rolled out iTunes in 2003, the MacBook in 2006, the iPhone in 2007, and the iPad in 2010. I wouldn’t bet in favor of Apple producing a line-up with that same depth and frequency again this decade, but I also wouldn’t bet against Apple introducing one or two new products in the coming 10 years that have the same market-shaping and profit-generating potential as Apple’s earlier innovations.
Additionally, Apple is eventually going to have to decide how to allocate the $70 billion on hand and the billions that continue to roll in. One obvious option is to use some of the billions to make strategic acquisitions. The caveat, of course, is the temptation for Apple to overspend. If company XYZ ought to be bought for around $3 billion, it’s easy to overpay and purchase the company for around $5 billion if you have over $70 billion burning a hole in your pocket. I have no reason to expect that Apple won’t be disciplined and prudent in its money management, but I think it’s wise to keep Microsoft’s $8.5 billion acquisition of Skype in mind as a textbook lesson on the perils of having excessive cash on hand. If Apple could gobble up a couple of $3-4 billion tech companies, it could add yet another diversified revenue stream to send money flowing into Apple’s coffers. If done right, this could put the icing on the cake for shareholders.
Apple could launch an aggressive dividend buyback program. Let’s say Apple wanted to reduce cash and cash equivalencies from about $70 billion to $30 billion by retiring $40 billion in Apple shares. And let’s say Apple buys back its shares at an average price of $380 per share. That would allow Apple to take about 105 million shares off the market. Apple currently has about 927 million shares outstanding. This move would reduce Apple’s total share count to about 822 million shares outstanding. This would increase per-share earnings by 11.3%. Instead of investors being entitled to $25.26 per share in earnings, each share would come to represent $28.11 worth of earnings. If Apple regularly did this with future profits, the increased owner earnings could be quite significant.
Apple could also always initiate a dividend, opening itself up to a whole new audience of potential investors who seek income with their investments. Let’s say Apple devoted 40% of earnings to dividends. Based on trailing 12-month earnings of $25.26 per share, it would launch an initial dividend of $10.10 per share. That would put its starting dividend yield at around 2.6%. If Apple, as predicted, raises earnings in the 20% sphere in the next couple of years and raises its dividend by 13% annually for a couple years, investors who get in now could enjoy a very nice dividend yield on initial investment when it’s all said and done, allowing them to accumulate more shares and greater ownership of their favorite company.
Apple was an excellent investment during the past decade, and I think it has very strong potential to be a great investment going forward. If you keep your expectations in check and cautiously assume Apple will deliver outperformance of a few percentage points relative to the overall market, then Apple’s future looks bright indeed.