I'm a big fan of history and business. Combine both of them and you have quite a passion. While reading on what makes companies into multi-baggers, Apple Inc. (NASDAQ:AAPL) came up. I started researching old documents on Apple Inc. which eventually led to the IPO. I wanted to know, what at the time, made Apple a multi-bagger. Multi-bagger is a term popularized by Peter Lynch, author of One Up on Wall-Street and a manager at the Magellan Fund at Fidelity Investments from 1977 to 1990. Peter Lynch often uses the term "10-bagger," which is when a stock goes up 10 times in value. I hope I'm not shocking anyone by stating the fact that Apple qualifies as a multi-bagger. Actually Apple is a multi, multi-bagger. My research led me to the Apple IPO, which was pretty interesting itself. So I decided to make an article out of it to share some of my research and findings. I might write an article on multi-bagger companies later. At today's price of $105, Apple is a 205-bagger plus from 1990 to today, without dividends. For those who observed Apple's share price from outside, the stock performance seemed to be an unbeatable machine. However, a closer look would reveal that it wasn't always a fantastic engine.
In 1977, Apple Computer (now known as Apple, Inc.) was a very different company and Steve Jobs was a very different entrepreneur. Apple had its IPO in 1980 which I review in detail below. By looking at Apple's stock price today, around ~$105 post-split, investing in Apple at the beginning would have looked like a no-brainer. You always hear people saying that if they bought Company X when it first came out, they would have been multi-millionaires today. The real story for early Apple investors, however, wasn't all sunshine and rainbows. This is not your classic "buy and hold" fairy tale. If you would have bought Apple at the beginning and held on to it, you would have been clinically depressed for a good part of your life, unless you get joy out of pain. I did open my article by mentioning that Apple is a multi-bagger, but you needed an 80% loss twice in order to get it.
First, let's start with the IPO then I will walk you through the performance history.
The Successful IPO
*Price per share mentioned are pre-splits numbers unless mentioned otherwise.
Source: Clipping from The New-York Times, December 15, 1980 - By Vartanig G. Vartan - Business - Print Headline: "New Stocks Drawing Intense Investor Interest"
I like how the clipping above had to mention that Apple was a Californian company that makes personal computers. For part of the research, I have to thank the Computer History Museum and The New York Times archives for my research. The Computer History Museum has two special documents from Apple Computer during the early days of personal computing. The first is the Preliminary Confidential Offering Memorandum - a document supporting a private placement of funds for Apple before the IPO. The document also contains the product and marketing plan. Computer History Museum CEO John Hollar noted the plan also "goes to great lengths to explain why anyone would even want a personal computer (e.g., forecasting eight reasons "that indeed, by 1985, a household using a computer will have significant advantages over one that doesn't"), and that every single competitor listed is no longer in the PC business." And if you are really interested, the second document is the Preliminary Macintosh Business Plan, which is post-IPO.
Source: Apple's Preliminary Confidential Offering Memorandum
Apple Computer Inc., now renamed Apple Inc., had its IPO (prospectus) more than thirty-five years ago, on December 12, 1980, with 4.6 million shares priced at $22 ($0.39 a share post-split). Since then the stock has split four times, including three 2-for-1 splits (1987, 2000, 2005) and recently one 7-for-1 split (2014). That means your 100 shares would have multiplied into 5,600 shares today, or 56 times your original holding. Apple raised $101 million. Apple sold 7.4% of the company of the 54.2 million shares outstanding at the time. On that day, the Dow soared 21.59 points to 958.79, staging its biggest one-day rally since spring 1980. The Dow jumped because of a surprise half-point reduction in the prime rate by Wells Fargo to 20.5%! (Yes, you read that correctly, interest rates were extremely high back then, don't ever forget that it could happen again).
During fiscal year 1980, Apple had sales of $118 million, up from 774k in 1977. Earnings also came at $11.7 million, or EPS of $0.24, compared with $41,575 or EPS of $0.01 in 1977. Now, think of how much Apple makes every minute. In 2015, Apple had sales of $233.7 billion and $53 billion in net income. Apple had a second offering of 2.6 million shares that quickly sold out in May 1981.
I found old news clipping below from The New York Times archives on Apple's IPO.
Source:The New York Times, December 13, 1980. First Business Page, Part 1.
Source:The New York Times, December 13, 1980. Page 3 of the Business Page, Part 2.
Source: The New-York Times, Business Digest, Saturday, December 13, 1980.
As the article states, the IPO was a major success. The shares jumped immediately to $29, peaked at $29.25, and closed at $28.75. The offering happened to be the largest IPO in 15 years at the time since Comsat (side note: Comsat is the same company that owned the Denver Nuggets from 1989 to 2000, and bought the NHL Quebec Nordiques and moved them to Denver as the Colorado Avalanche. Comsat was acquired by Lockheed Martin Corp. (LMT)). The original offering was estimated at between $14 and $17, but due to strong demand was raised to $20 and $22.
An interesting detail in the article is that the SEC went after a broker because he told clients that the stock would double or triple in value after they bought it. If the SEC was successful in the suit, it would have given the stockholders their money back. I have no clue how it turned out. "After they bought it" is a very subjective term. "After they bought it" the next day, or "after they bought it" in a couple years as a buy and hold strategy. Apple definitely more than tripled, but it depends what time frame you are referring to. Also, Apple's IPO wasn't available in 20 states like Massachusetts because it was considered "too risky." According to a state spokesman, Apple's book value was well below that state's required 20% of stock price. Based on $22 a share, Apple was selling at 9.65% book value. Basically, under Massachusetts regulation at the time, the share could be sold no more than $11.50 each. In addition, Massachusetts limited stock prices to 25x price to earnings for the most recent fiscal years. That means Apple would have had to price its IPO at $5.50 a share to meet state requirements. A lot of other states had strict laws on new issues, which prevented Apple from offering the stock.
Since 1980, it seems that investors' attitude toward lofty price-to-earnings ratios for young promising technology companies didn't change much. Investors back then were looking for the next hot issue, or then called "Xeroxes," named after the company Xerox (XRX), an original Nifty-Fifty glamour stock in the early 1970s. This was one year after the famous 1979 cover of BusinessWeek titled, "The Death of Equities" (which eventually proved a vivid contrary indicator). Apple was selling well above 100x P/E, or about 50x 1981's earnings of an estimated 60 cents per share. You can say that Apple "grew" into its multiple. To better understand the context, Robert Metz from the New York Times reported this in his article:
"Consider Apple Computer, surely one of the Horatio Alger stories of our time. This young company specializes in the manufacture and sale of computer terminals for home use. At a time when experts are predicting a terminal in every home, Apple has captured the imagination of Wall Street and the investing public as well."
Experts predicting a terminal in every home… And there's more:
…Apple Computer, a small company relative to most listed on the New York Stock Exchange, is carrying a total market capitalization of $2 billion, or more than Warner-Lambert's $1.8 billion or St. Regis Paper's $1.1 billion, though not quite so much as Sony's $3.3 billion. A professional investor who is not at liberty to be quoted finds Apple seriously overpriced and compares it with its rival, Tandy. He notes that Apple's computer terminals are sold through independent retail stores that offer the terminals of competitors as well. Meanwhile, Tandy has 7,000 of its own stores, including 125 that offer computers only. -From Market Place; What Price Technology? By Robert Metz Published: January 28, 1981 in The New York Times.
First, I honestly had to google Tandy and it turns out to be a pretty long story, according to Wikipedia. Tandy was a leather goods store that ended up acquiring RadioShack (RSH) in 1963. Well, I'm familiar with RadioShack since it's my favorite place to go every time I need a soldering iron. Tandy was one of three companies (along with Commodore International and Apple) that started the personal computer revolution in 1977. It was reported that at the time of the IPO, Apple lagged behind Tandy in sales of personal computers. We know how this story ends. Apple is now worth $588 billion and RadioShack filed for Chapter 11. However, RadioShack has a slight advantage over the Apple store, you don't need to wait in line at the cash register to get an Apple charger.
As to the other companies mentioned in the clipping above, Warner-Lambert was a pharmaceutical company that was acquired by Pfizer (NYSE:PFE) and St. Regis Paper's was acquired by The Champion International Corporation in 1984.
Below is an enlargement of the news clip above. As you can see, Steve Jobs is the largest shareholder followed by A.C. Markkula Jr., who provided early financing of $250,000 to Apple. Venrock is the venture capital arm of the Rockerfeller family. There's one name in particular that caught my attention. That's Henry E. Singleton, the co-founder of Teledyne Inc., one of America's most successful conglomerates. He's also featured in the outstanding book, the Outsiders by William Thorndike, which highlights master capital allocators. Mr. Singleton happened to be a director of the company and was a primary financial backer of the company in 1977.
Source: The New York Times, December 13, 1980. First Business Page, Part 1.
Beside Steve Jobs and Steve Wozniak, a little-known fact is that Apple had a third co-founder, his name was Ron Wayne. Mr. Wayne was twice as old as both Steves and was supposed to be the "adult" in the newly formed partnership. However, two weeks later, he sold his 10% stake in the company for $800 and then put all his savings in gold. Bloomberg documented the episode. He also drew the first company logo, depicting Sir Isaac Newton sitting beneath an apple tree.
Apple Computer's first logo. 1977.
Below are a few charts on the performance of Apple. The first is Apple's all-time performance.
AAPL data by YCharts
The chart above has 35 years of data. As you can see, Apple's monstrous gain happened in the last ten years. For a 205x bagger, the company looked mostly uninvestable for the large majority of its existence.
Below I zoomed in on the 1980s to have a closer look.
AAPL data by YCharts
In the '80s, Apple was working hard at piercing the market and coming out with new products. It was going head to head with tough competition such as IBM (NYSE:IBM). Apple II was a success but Apple III didn't turn out too well and was discontinued in 1984. As promising as it looked, the Lisa computer also was a flop. In 1984, we saw the debut of the Macintosh, the "people's computer." The Macintosh had strong sales but the company was struggling with internal problems. In 1985, a boardroom showdown got Steve Jobs ousted from the company. Jobs and several other executives left and founded a new computer company called NeXT Inc., which would later be an Apple competitor. The second half of the decade was marked by expansion, operational problems and a reorganization. The stock still managed much higher than its IPO price of $0.39, adjusted for splits.
AAPL data by YCharts
Through much of the 1990s, Apple's shares went nowhere, until 1999. You have to remember that Apple was at one point on the verge of bankruptcy. Apple suffered from mismanagement as one CEO after another faltered miserably. In 1997, Steve Jobs came back to rescue the company. When he returned to the company 12 years after being ousted by the board, Apple had run up $1.86 billion in losses over two years. Apple was 90 days away from bankruptcy, Jobs would later say. Microsoft (NASDAQ:MSFT), of all the companies, had to come to Apple's rescue with a $150 million investment (YouTube). In 1998, the iMac came out and Apple finally turned a profit. Investors took notice as the chart above demonstrates.
AAPL data by YCharts
In 2001, the iPod first Generation was released and you know the rest of the story. Then came the iPods, iPads, iPhones, iMacs, iBooks, iTunes and the Apple Stores. It's labeled as one of the greatest comebacks in corporate history. The rewards were high, so was the risk.
The turning point in the stock chart is in 2004 when the stock started its exponential meteoric rise. The year also coincided with iTunes turning one-year-old and grabbing 70% market share of legal downloaded music. In 2007, Apple hit another homerun with the release of the iPhone that dethroned BlackBerry (NASDAQ:BBRY) for smartphone market share. The iPhone revolutionized the mobile industry. The iPhone became Apple's most profitable product and brought the company great gains.
The verdict here is that even though it's easy to point out at how much money you would have made with your Apple shares, it's not the example to use when bringing up the "buy and hold" strategy. Apple should be categorized in the best turnaround situation. Unless you were a MacAddict (remember those), investors didn't really have any business investing in Apple until around 2004. From 1980 to today, Apple wasn't an attractive buy and hold considering what investors had to go through for the first twenty years. It's only really in the last 15 years and mostly near the mid-2000s that it was really worth buying and sitting on the shares. Steve Jobs had to come back and restructure the company before it became investable.
Apple managed to reinvent itself into a much better company, one of the most regarded in the world. Apple released must-have products before customers would even know they would want it. Innovation and thinking differently has been a key component in Apple's second coming.
It's amazing how much technology has changed. Normally, Apple would be considered "old tech," up there with IBM, Xerox (NYSE:XRX) and HP (NYSE:HPQ), among others. But Apple has been able to reinvent itself into one most admirable companies, right there with the "new tech" guys like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Apple went from super cool (late '70s-'80s), to near death ('90s), back to super cool (~2000s-now). Apple is one of the companies that reshaped the world we live in. What's next for Apple? With all due respect to Tim Cook, Steve Jobs was irreplaceable. How different (and inferior) would our technology be today if Steve Jobs had not shepherded the development of the iPod, iPhone, iPad and iTunes store? Other than updating the legacy products (phone, tablets, etc.), Apple hasn't released a new slam dunk product. There's something to do with wearable devices but it's more of a gadget for now. During the '90s, Microsoft Windows took over the world and it looked unmovable from its throne. Like I said, technology can change really fast. Change happens gradually, but it will look as if it happened suddenly. Apple is doing well in the short-run without Steve Jobs - it's the long run that's more uncertain. Apple almost went extinct, so it probably knows better than anybody how important it is to innovate. For the last decade, Apple has been about releasing the best products and creating new markets where there wasn't a demand before. Will it be able to do that same thing in 10 years or will it play catch up like Microsoft did in the 2000s?
I hope you enjoyed this little piece of IPO history.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.