I Was Wrong About Apple

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Apple (Nasdaq: AAPL  ) has climbed 69% in the past year to become the second-largest company in the world. Yet that very success is now holding shares back, as investors worry about its ability to grow in the future. As an analyst for the Stock Advisor newsletter service, I've been covering the company for the past two-and-a-half years. And I have to tell you, I've never seen the company better positioned for growth than it is today.

Now, I've been an Apple bear in the past, selling my shares at $240 nearly a year ago, believing that Steve Jobs couldn't care less about us, even writing an article on why I wouldn't buy Apple for my Messed-Up Expectations portfolio. But as Warren Buffett says, there are no called strikes in investing. In other words, there's nothing to prevent me from changing my mind.

What's changing my mind today is being used by others as reason to stay away: Steve Jobs' health.

Steve is the man
The day before Apple released its latest earnings report, Jobs announced that he is taking a leave of absence to concentrate on his health. You may remember that he did this just two short years ago and both Jobs and Apple were extremely reticent in discussing his health. The questions on everyone's mind are: What's wrong with him and will he come back? Those questions are creating today's opportunity.

To a large number of investors and Apple loyalists, Steve Jobs is Apple. He founded the company, was forced out, and came back just in time to lead it back to glory. His has been the vision and drive behind the simplicity of design of all of Apple's products. The company just would not be the same without him.

I'll admit it right up front: Yes, that is true. But just as Buffett's Berkshire Hathaway will survive when Buffett and Charlie Munger finally shuffle off this mortal coil, Apple will as well. Jobs has surrounded himself with people just as driven as he is to succeed. While Jobs may have been the major guiding light, he's not the only brilliant, driven person at the company. Apple has a deep bench. Here are four members:

  • Tim Cook, current COO and acting CEO, is the operations expert, turning Apple into a finely tuned machine over the past decade.
  • Jonathan Ive, the principal designer of the iMac, MacBook, iPhone, iPod, and iPad. Jobs may have some of the ideas, but Ive turns them into reality.
  • Phillip Schiller, the marketing chief behind the dancing iPod figures and app demonstrations on the iPad. Great products may sell themselves, but a boost never hurts.
  • Scott Forstall, head of Apple's iOS and OSX operating platform design, and one of the NeXT leaders who moved back to Apple with Jobs back in the day. He's helped keep the code running the products clean and tidy.

Many companies have had trouble when the founder/leader finally leaves. Microsoft (Nasdaq: MSFT  ) has stagnated ever since Bill Gates left and is only now appearing to be doing something right again. Both Dell (Nasdaq: DELL  ) and Starbucks (Nasdaq: SBUX  ) stumbled badly after their founders stepped aside, only to begin to recover when they came back. The same happened with Apple back in the 1980s and 1990s during Jobs' absence. But the company is much different today, with a united management team and a common vision.

Boy, do they have a vision
Apple and its innovative, easy-to-use products have flooded the market in recent years, beginning with the music-playing iPod and continuing with the iPhone and, most recently, the tablet computer iPad. The success of these products and the relentless string of beating analysts' earnings estimates -- at least 25 quarters in a row and counting -- have propelled the share price to record highs. Despite that, the growth is not over.

Apple's new deal with Verizon will lead to more growth in the number of iPhones sold. The iPad has had a phenomenally successful first six months, selling more than 6.5 million in the first two quarters after launch. Better yet, during its recently announced holiday quarter, Apple accelerated iPad sales to the tune of 7.3 million units. The new computing platform is proving to be very popular and Apple should do well continuing to sell it both here at home and internationally. And the success of these products plays into the growth of Apple's Mac computer sales, growing 23% year-over-year.

Obviously I expect Apple's growth to continue. Even better, I haven't seen the company as cheap as it is today in a very long time. Thanks to Apple's growth in earnings, it is now trading at a P/E of just 18.8. And thanks to its $59.7 billion cash and investment hoard (and no debt) alongside its $19.7 billion in free cash flow, it is trading at an enterprise value-to-FCF ratio of just 12.7.

Yes, I've been an Apple bear, but that doesn't mean I always have to be. Today, I'm adding Apple to My Watchlist and I urge you to do the same.

Microsoft is a Motley Fool Inside Value selection. Apple and Starbucks are Stock Advisor picks. The Fool has written puts on Apple. 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 may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool analyst Jim Mueller owns shares of Starbucks, but not of any other company mentioned. He works for the Stock Advisor newsletter service. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (24)

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 31, 2011, at 5:20 PM, EquityBull wrote:

    Welcome back to the club. You should take apple off your watchlist and put it in your portfolio. You are lucky to be able to get shares cheaper today then you did when you sold them in the 200's. Remember price is what you pay, value is what you get. Apple is a better value today with a bigger moat and thus a safer bet with a substantial margin of safety even if jobs is unable to return to full time on-site duties (he currently is still CEO of Apple)

  • Report this Comment On January 31, 2011, at 7:36 PM, PeyDaFool wrote:

    I was disappointed Anders, a MF author who would never admit to being wrong, was not the author of this article.

  • Report this Comment On January 31, 2011, at 10:43 PM, ikkyu2 wrote:

    If I were Steve Jobs, I'd take my $75 billion cash pile and go looking for some content generators to leverage onto my best-of-breed content sales-and-delivery model. I'd be looking quite carefully at how Comcast - which also fancies itself a content-deliverer - just bought up NBC/Universal, which it is managing with GE as a 49% minority stakeholder.

    But of course, doing that would mean a lot of handshaking and due diligence. I probably couldn't stay on top of day to day operations at AAPL as CEO if I decided to do that. I'd have to step down and let someone else take over operations for a time.


  • Report this Comment On February 01, 2011, at 10:40 AM, Brent2223 wrote:

    I don't think there is doubt that Apple can continue to be a well run company, as your list of bench players proves. However, I think Apple's success is the constant evolution of products, and without Job's is this going to continue? The iPhone isn't sliced bread, it'll be replaced by a better product in the years to come. Arguably there are already better products. The question comes down to how much of Apple's 'coolness' is attributable to Job's?

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