How Apple Became a 100-Bagger

This article has been adapted from our sister site across the pond, Fool U.K.

If you want a perfect example of a corporate phoenix rising from the ashes, then few companies better fit the bill than Apple (Nasdaq: AAPL  ) .

Apple seeds
Apple Computer was founded in California in 1976 by Steve Jobs, Steve "Woz" Wozniak, and "forgotten founder" Ronald Wayne. That same year, Wayne gave up his 10% stake in the firm for a total of $2,300. Today, this holding would be worth $32 billion, making Wayne the world's fourth-richest person!

The early years of Apple were all about personal computers, including models such as the now-legendary Apple II series (1977), which I used as a schoolboy. Unfortunately, the Apple III (1980) was poorly received, as was the Lisa (1983).

However, in 1984, Apple hit the jackpot with the first of its Macintosh ("Mac") range, the sales of which were boosted by a groundbreaking advertising campaign modeled on George Orwell's 1984. Likewise, the Mac's intuitive graphical user interface became the foundation for modern-day computers.

Sorry, no Jobs
Companies often stumble when a founding CEO departs, and Apple was no exception to this trend. Following a power struggle with CEO John Sculley, Jobs left Apple in 1985 to launch NeXT, a maker of high-end computer workstations.

In 1991, Apple launched the PowerBook, seen as the successful prototype for today's lightweight-yet-powerful laptop computers. Indeed, the PowerBook range ran for 15 years until superseded in 2006.

In the early '90s, Apple started slipping up, launching ill-fated products such as the Performa and Newton ranges. Furthermore, the company's sales were hit as low-cost PCs powered by Microsoft Windows gobbled up market share.

A golden Apple
Even though Apple underwent a commercial comeback between 1994 and 1997, its share price headed steadily south. Quarterly dividends were cancelled in November 1995 and never returned. Its share price dwindled from over $12 in mid-1995 to under $3.50 in mid-1997.

However, millions of Apple fans never lost faith and continued to sing the praises of the company's innovative products (and buy its shares). After mass layoffs in 1996, the faithful were rewarded with the return of Steve Jobs as CEO in 1997. That same year, the online Apple Store was launched, perfectly placed to take advantage of growing Internet usage.

In 1998, Apple launched the hugely successful iMac, designed by Brit Jonathan Ive and his team, which started selling in the millions. As well as radical designs for hardware, Apple broke ground with its new Mac OS X operating system, released in 2001.

2001 was also the year of the iPod music player, again designed by Ive's team, and saw the launch of "killer app" iTunes, which celebrated its 10th birthday last week. In 2003, Apple's iTunes Store opened for business, selling music downloads for less than $1 each. Today, iTunes is the largest online store of its kind, with more than 10 billion downloads.

I'll skate over the rest of Apple's recent history in a few words: iPhone, iPad, App Store, MacBook Air, Snow Leopard, Apple TV, The Beatles on iTunes, yada, yada.

How was Apple polished?
In 13 years, Apple's share price has risen a hundredfold and, as I write, has just breached $346 for the first time. Today, the iconic company is worth $319 billion, making it the world's biggest technology company by market cap. For the record, Apple overtook Microsoft in May 2010 to take this coveted No. 1 slot.

In 2009-10, Apple recorded yearly sales of over $65 billion -- more than 10 times its 2003 revenue. Gross margins of nearly 40% helped the company to record net income of $14 billion, 70% ahead of its 2008-09 result. Hence, the company's cash pile is mushrooming: $47 billion and counting.

How did Apple become such a financial juggernaut? I attribute its success to three things:

1. New (old) management
Steve Jobs' importance in Apple's turnaround cannot be underestimated. Also, the hardware and software bounty Jobs brought to the table when Apple bought NeXT in 1997 played a key role in its future success.

During Apple's wilderness years under CEOs John Sculley, Michael Spindler, and Gil Amelio, the company was rocked by management in-fighting and product mis-launches. Since Jobs returned, Apple has barely put a foot wrong. Indeed, when Jobs announced that he was taking a six-month sabbatical in 2009 to be treated for pancreatic cancer, Apple's share price dived.

2. Must-have products
To my mind, Apple's commercial success stems from its matchless ability to marry form and function to create sought-after consumer products. Thanks to designers such as Jonathan Ive, user-friendliness and desirability lie at the heart of the Apple approach. Nobody does it better.

In addition, Apple offers its customers a completely integrated package, consisting of unrivaled hardware, software, and online offerings. This integration makes Apple a commercial powerhouse, as when you buy one Apple product, you're tied in to the brand and likely to buy more.

3. Unmatched marketing
Finally, Apple is the supreme master of branding, marketing, and advertising, wowing both consumers and the media alike. More than any of its rivals, Apple has used elegant logos, cool slogans, and flamboyant advertising campaigns to place its products at the front of minds.

What next?
Despite its large cash pile, Apple would fail most value-investing tests, thanks to no dividend and a price-to-earnings ratio of around 22.

Nevertheless, with its vast "competitive moat" and plenty of room to grow its modest global market shares in laptops, desktops, and smartphones, I wouldn't bet against Apple's continuing ability to thrash the Standard & Poor's 500 index. If quality counts, then "the Big Apple" could one day see its shares hit $1,000. Who knows?

More on the markets:

Microsoft is a Motley Fool Inside Value selection. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2011, at 1:38 PM, turkeybird wrote:

    Very interesting article. It would be also interesting to find out just how many $ millionaires Apple stock has created.

  • Report this Comment On January 16, 2011, at 5:03 PM, ConstableOdo wrote:

    If the company is such a financial juggernaut, why are there so many people that are sure Apple will collapse within the next couple of years and Microsoft will go on forever? I'm an Apple shareholder and I've made a fair amount of money from them, but even I have a hard time believing that Apple will ever reach $500 a share and will certainly never see $1000 a share. I do feel Apple has at least five more years to prosper and turn into a respected and trusted company. I hope that much happens.

  • Report this Comment On January 16, 2011, at 5:24 PM, gslusher wrote:

    @ConstableOdo:

    "I'm an Apple shareholder and I've made a fair amount of money from them, but even I have a hard time believing that Apple will ever reach $500 a share and will certainly never see $1000 a share."

    First, there might be a split, so one has to consider adjusted prices.

    Second, what happens if Apple doubles or even triples its revenue and earnings? That could happen with increasing sales of the Mac, iPhone and iPad. Apple's P/E is fairly low for the sort of company it is. Would the P/E drop drastically if the earnings increase a lot?

  • Report this Comment On January 17, 2011, at 11:26 AM, baldheadeddork wrote:

    @gslusher

    "(W)hat happens if Apple doubles or even triples its revenue and earnings? That could happen with increasing sales of the Mac, iPhone and iPad."

    I don't see how you can look at Apple objectively and make that kind of prediction. Their revenues now are based on the iPhone having about 25% of the global market. Are you saying that its going to go to 75%?

    They're not going to get there on Mac-based computers. That market share has been stuck at just under 10% for over a decade. The tablet market is a bit of a mystery. iPad users love their device, but its owners are equally quick to admit that it's just a toy.

    There are real reasons to be concerned about the future for Apple. Steve Jobs stepping down again today for another medical leave is something people have feared, but I think that's the least of their problems.

    Let's look back at Apple's amazing decade and see if what got them to this point can carry them forward. Apple in 2000 was pretty much left for dead. Their turn-around started in October 2001 when they introduced the iPod. It was a great device and a cash cow for Apple because for the first few years you had to buy content for it from iTunes. On the strength of iPod and iTunes sales AAPL went from 8 to 86 at the end of 2006.

    But by the end of 2006 the iPod was running out of steam. The market for high end players was saturated and Apple had to relent and allow users to import content bought from other stores to their iPods.

    Fortunately for them, January 2007 brought the announcement of the iPhone. It wasn't the first smart phone, but it was the first one to break through to the consumer market.

    It's been a massive success for Apple, but probably not for the reason you think. Apple sells the iPhone to AT&T (and now Verizon) for an average price of $610 per unit, twice the cost of the next most expensive platform. But competition with other smartphone platforms forced AT&T to price the iPhone at $200 retail.

    Apple's success for the last four years has come from AT&T being forced to act against its own best interests in order to remain competitive. As long as AT&T had an exclusive on the iPhone it made sense for them to do that. But with the iPhone moving to other vendors, now AT&T is only hurting itself by pricing the iPhone against Verizon's Android lineup. (Or AT&T's Android phones, which it announced at CES last week.)

    The same goes for Verizon. Why should they eat $400 on an iPhone just to keep it at the same price as a Droid? Does Best Buy cut $400 off a MacBook just to price it the same as a Dell or Sony? There's no place on earth where this makes sense.

    Verizon and AT&T will raise the retail price of the iPhone to reflect Apple's higher wholesale price, it's only a question of when and how much. My guess is the iPhone 5, and I think retail pricing will start at $300-350, while the Androids will still launch at the $200 price point. Like everything else with the Apple logo, if you want it you better be prepared to pay a 50% premium to get it.

    What happens to iPhone sales then? You're talking a net difference of $100-150 over a two year contract so I don't think Apple's market share will fall to the 10% level they have in PC's. But they will take a hit. Share prices typically don't respond well when that happens under the best of circumstances. When it's been a high flying stock the market reaction is usually brutal. Look at the beating Coinstar took last week when they missed estimates and lowered future guidance.

    That's the risk with AAPL in the near future. The only way out I see is another life-changing product that also has the same economic advantages as the iPod and iPhone. That's a tall order. I don't think the iPad is it. Retailers won't take a loss to sell it at the same price as Android tablets and it doesn't require giving more money to Apple to fill it up with media. Apple TV is a dubious success at best, but even if it's a big hit it's never going to have the same impact on Apple's bottom line because of pricing and content.

  • Report this Comment On January 17, 2011, at 11:58 PM, RipRagge wrote:

    The Apple juggernaut will continue for a few years. At least as long as the current management team stays the course.

    Apple currently has no competitors. Individual Apple products have nominal competition, but there is no company that competes with Apple's techosphere.

    With the exception of Apple, the entire tech industry is competing with each other for the least profitable segment of the market, while letting "reverse engineering" stand in for innovation. At the other end, Apple owns the high profit end of all of its markets.

    Apple is cheap at $350. Not as cheap as it was when I bought 100 shares in 1998, but cheap, nevertheless.

  • Report this Comment On February 08, 2011, at 5:08 PM, gslusher wrote:

    @baldheadeddork:

    "I don't see how you can look at Apple objectively and make that kind of prediction. Their revenues now are based on the iPhone having about 25% of the global market. Are you saying that its going to go to 75%?"

    The iPhone is nowhere near 25% of any global market. In the December quarter, Apple sold 16.2M iPhones worldwide. IDC just reported that there were a bit over 100M smarthphones sold globally in the same quarter. That would give Apple 16% of the global smartphone market. If one looks at the global handset market, the iPhone is only a few percent.

    The sales of smartphones are rising rapidly, up 87% from the same quarter last year, according to IDC. That's about the same as the increase in iPhone sales, year over year (86%). Apple's revenue from iPhones actually increased slightly more, indicating a slightly higher ASP. The Verizon iPhone should add quite a bit, plus now Apple could sell iPhones to the 180M CDMA users in India and China.

    The iPad added $4.6B to Apple's revenue for the December quarter. That's nearly as much as all Mac sales ($5.43B), which, itself, was a 34% increase over the previous year. The iPad brought in 17% of Apple's revenue for that quarter. This should increase as the iPad becomes available in more countries and, if the rumors are correct, the iPad 2 will have a "world" chip (GSM & CDMA) usable almost anywhere. I've seen estimates of 30M to 60M iPads sold in 2011, which would increase Apple's revenue a lot.

    Even though iPod unit sales declined 7% year-over-year, iPod revenue actually increased very slightly (1%) because over half of iPods bought were iPod touches. (In the past, the iPod Nano was the best-selling iPod.) Since the iPod touch really doesn't have any competitors yet, it's a strong product and could keep iPod revenues up despite overall decline in units sold. Many teens I work with have iPod touches. Their parents won't get them smartphones (and they really don't need them, as their primary phone use is texting), but will get them an iPod touch. (The kids have wifi access at school, another reason they don't need iPhones.)

    All told, Apple's quarterly revenue increased 71% year-over-year.

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