After Steve Jobs, How Does Apple Carry On?

Last night, the sad news that Steve Jobs had passed on hit the newswires. An outpouring of grief has followed; few leaders have had the transformative impact of Steve Jobs. His turnaround story and "second act" at Apple (Nasdaq: AAPL  ) will forever be remembered as one of the greatest examples of vision and leadership. As my colleague Evan Niu said last night in a tribute to Steve Jobs, "One reason that might explain why we feel so close to him is that he had an uncanny ability to access the deepest recesses of our minds and imaginations, even without knowing us individually."

Beneath is a timeline showing the amazing string of successes achieved after Jobs took back over as CEO in 1997.

While it's difficult to transition to thinking about the future of Apple so quickly after the passing of Steve Jobs, it's also a company on which many people have pinned their own hopes and dreams. Apple is worth $350 billion, meaning retirement savings, college funds, and the savings of a large part of the population are vested in the company. These are investors who have bet on Steve Jobs' vision.

While Jobs had already stepped down as CEO, he had stayed on as chairman of the board. Many had felt his guidance would still lead the company behind the scenes. With his passing, Apple must operate without his legendary vision. How should investors proceed?

Why Apple will continue performing without Steve Jobs
Apple's a much different creature than it was only five or 10 years ago. Even though the media stays anchored on Apple as a "hit-driven" company needing to constantly reinvent the wheel, this isn't a fair characterization. Today, more than 70% of Apple's sales -- and a greater percentage of profits -- come from its mobile platform, iOS. Having a strong mobile platform with plenty of developer support is actually Apple's greatest achievement.

Both the iPhone and iPad have large and growing addressable markets ahead of them, meaning their slice of Apple's sales pie should only keep growing in the years ahead. Not only that, but they're still hitting new ways to distribute. In China, the iPhone is currently sold exclusively on China Unicom (NYSE: CHU  ) , a carrier that only covers about 12% of the population, and yet Apple still has collected more than 10% of its total sales from the country so far this year. There's a lot of room for expansion in the country.

What's important to remember is that Apple not only understands consumer behavior so well -- and used that understanding to redefine MP3 players, laptops, smartphones, and even tablets -- but it also has a key understanding of branding. Other smartphone makers largely associate their goodwill with esoteric names like "The Galaxy S2" that get promoted before the company. While one phone might be a success, continuing dominance is fleeting between product lines with different names.

However, Apple has long-lived product lines that are consistently named and associated with the company itself. The iPhone 4 has two main points of emphasis on its back. The Apple logo and the word "iPhone." There's no mention of iPhone version "X," just the long-lived iPhone brand.

This is an extremely important point to make because it shows in a succinct way why Apple is seeing $8.8 billion in sales to a market like China (in the last nine months alone) where the average person only makes around $4,000 per year. Apple isn't a cutting-edge technology company anymore. Sure, technology is important and so are new innovations like the iPhone 4S' integration of Siri. But the key driving factor in Apple's success is that it has become an aspirational brand associated with prestige and quality. In that respect, it shares more in common with a retailer like Coach than it does with a fellow technology titan like Microsoft (Nasdaq: MSFT  ) .

That's a powerful idea. While high-tech consumers might grouse about Apple's copying certain ideas or failing to hit the specs found on other top-line phones, to the average consumer it doesn't matter. Apple's managed to cement itself as a company selling the premium product across the computing industry. Better yet, the larger it gets the more scale it commands to undercut pricing on competitors and improve margins.

What threats remain
Still, threats remain. The largest threat to Apple right now is reduced nimbleness because of size. There are only five technology companies in the world with higher sales than Apple.

Company

Trailing Sales (millions)

Profit Margin

Samsung $148,472 8.7%
Hewlett-Packard (NYSE: HPQ  ) $127,969 7.3%
Hon Hai (Foxconn) $114,891 2.1%
Hitachi (NYSE: HIT  ) $103,842 1.7%
IBM (NYSE: IBM  ) $102,341 14.7%
Apple $100,322 23.5%

Source: Capital IQ, a division of Standard & Poor's.

That's a stunning table to take in. By the end of next year, Apple should be at least the second-largest company in the technology industry despite selling high-margin "end of the value chain" products. There's simply no precedent for what the company's doing.

This size presents challenges in addition to the opportunities like scale discussed above. For example, Apple's recently unveiled iPhone 4S makes few external design changes. That could be in large part because Apple already has its Asian supply chain so well set up to produce the existing iPhone 4. An update like adding a larger screen would have presented additional complexities and possible launch delays. Apple's sticking with the existing design is surely the result of some level of pragmatism. That word might cause some Apple consumers and investors to wince. Apple has never been associated with pragmatism, instead favoring a "think different" approach and rule breaker bent.

In the reality of its new size, Apple may increasingly have to make concessions to aid the major ramp up of new product lines. That may come back to haunt the company. When you're selling a top-line brand, consumers are often buying on prestige and their ability to distinguish themselves. Apple selling an iPhone 4S without any design tweaks might not fundamentally alter the phone's performance, but it could turn away buyers hoping for a product that distinguishes them as having the "newest, greatest thing."

Apple will likely still sell record numbers of iPhones this holiday season and will show few negative signs from not changing the design of the iPhone 4S. However, it does ramp up the company's need to "wow" consumers when the iPhone 5 hits. That's a longer-term threat for investors to keep their eyes on.

Bottom line
The key idea is that Apple's momentum should remain in place without Steve Jobs. In the long run, no one can replace the complete package Steve Jobs brings to the table, but Apple has an excellent mobile platform that can easily be moved in new directions like home entertainment. Steve Jobs realized the "Eureka" moment creating iOS and getting developers behind it, the challenge now is maximizing the platform's potential.

Challenges remain ahead, so know where to keep an eye out. However, trading at just 15 times earnings with $76 billion in the bank, Apple still looks like a steal.

To stay updated on Apple as the company transitions into the post-Steve Jobs era, make sure to add the company to our free My Watchlist service. It'll deliver all the Fool's best news and analysis on your favorite companies in one central place. To get started just click here, it's free!

Eric Bleeker owns shares of no companies listed above. You can follow Eric on Twitter to see all of his technology and market commentary. The Motley Fool owns shares of Microsoft, Apple, and International Business Machines. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in 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. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (58)

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 October 06, 2011, at 12:29 PM, ashwindollar wrote:

    The iPhone 3GS was identical to the iPhone 3G, so I don't see why anything's different. They were still able to make the iPhone 4 the next year.

    There's numerous factors I think led to a lack of a major change this year

    1) Japan, and delays in getting production back on line

    2) Tim Cook taking over, and getting employees used to not having Steve around

    3) An even more amazing hardware upgrade next year. It's hard to get more amazing than the iPhone 4 though.

  • Report this Comment On October 06, 2011, at 5:31 PM, prashton wrote:

    An excellent analysis. I have been buying AAPL since 2003 and am a very happy shareholder. The only worry I have about the future is the stupid negative comments that come from so many ill-informed analysts. This is particularly true in the UK where there is an envy attitude that cannot accept that success just might be based on genius.

    The key, therefore is to believe that Apple has a positive life after the sad demise of Steve Jobs. He has planned for this, so I am not worried. The problem is that so many people want to believe the negatives; my message is to "think different".

    Steve Jobs - you will be missed but your legacy is assured.

  • Report this Comment On October 06, 2011, at 5:33 PM, Darwood11 wrote:

    Hmmm, perhaps they could bring back the "Newton?"

  • Report this Comment On October 06, 2011, at 5:34 PM, dalehoward wrote:

    In response to the premise of this article, once might ponder how did IBM go on or Coca-Cola after their founders died.

    $1.00 of KO in 1900 is not worth over $1,000,000

    I don't know the figures for IBM.

    Dale Howard

    Atlanta, GA

    PS--I will continue to invest in Apple

  • Report this Comment On October 06, 2011, at 5:42 PM, Tycraz wrote:

    Long live Steve

  • Report this Comment On October 06, 2011, at 6:33 PM, TMFNewCow wrote:

    Didn't realize Hon Hai generated so much revenue.

    -- Evan

  • Report this Comment On October 06, 2011, at 6:52 PM, midnightmoney wrote:

    Wow, y'all ain't wastin' no time! Grooving on the vertical graphic that correlates the last years of the man's life to a stock price:) especially the price of his stock on the day he died. Good grief...

  • Report this Comment On October 06, 2011, at 7:59 PM, jag99 wrote:

    Apple is valued on its past. Revenues may disappear quick if the next rabbitt does not come out of Apple's hat, if somebody else becomes the guru on defining what is cool. Teenagers don't relate to corporations, they relate to individuals. Who is the next individual ? Who says that person is at Apple ? What are the odds that this individual is elsewhere ?

    How the valuation of such fragility can be even in the same ball park as Exxon.... beyond me...

  • Report this Comment On October 06, 2011, at 9:04 PM, pastreet wrote:

    Steve Jobs has had years to hand pick his successors. His company is in good hands, but AAPL and the world will never be the same without him.

    Here's a tribute:

    http://www.compoundingreturns.com/2011/10/why-we-mourned-str...

    Pat

  • Report this Comment On October 06, 2011, at 9:18 PM, lutece7 wrote:

    Darwood wrote: "Hmmm, perhaps they could bring back the "Newton?"

    the Newton was ahead of its time, and although it did not succeed, it was a very helpful experiment for Apple that they learned a lot from and they used what they learned to help them get to where they are today. Apple killed the Newton because it didn't meet Job's high standards, most companies would have tried to prop it up a lot longer, because they are so desperate for anything innovative. The Newton had some very cool features, it was no Zune, that is for sure. So Darwood, you may think you have made a witty little comment, but I think it is a very hollow statement. What is the opposite of "touche"?

    Darwood, what is your favorite Apple product of all the dozens of mega-successful Apple products?

  • Report this Comment On October 06, 2011, at 9:28 PM, atarheelfool wrote:

    No disrespect intended to the memory of Steve Jobs, his family or the Apple family or investors, but the world will go on just as it has after the passing of other great innovators. I would imagine that Mr. Jobs and the brain trust of Apple had long planned for this day and that the business model that enabled the company to be as successful as it has been the past 10 years will continue. That said, vultures will circle and there may be some vulnerability initially but I think Apple will be ok.

  • Report this Comment On October 06, 2011, at 11:09 PM, smartin619 wrote:

    Jag99, Apple is not the same company. It's moving into business and international markets. It is no longer about the iCult.

  • Report this Comment On October 07, 2011, at 6:55 AM, daveandrae wrote:

    At the end of the day, it doesn't matter what stock symbol you attach to the market cap, it still takes a tremendous amount of energy to double three hundred and sixty BILLION dollars. Just ask GE, Pfizer and Microsoft. Their collective valuations have since been cut by more than half over the last twelve years!

  • Report this Comment On October 07, 2011, at 11:46 AM, huddaman wrote:

    How did you come up with 78b cash? Their June 25 10q shows 12b cash and 16b short mkt securities adding upto only 28b. Please clarify your magic source. Btw , you are not alone. Others have reported that too. I am not suggesting you are trying to mislead. But i do wish to know how did you and others come up with the extra 50b.

  • Report this Comment On October 07, 2011, at 12:12 PM, TMFRhino wrote:

    Huddaman

    Thanks for asking. You're correct on the short term figures.

    Cash And Equivalents 12,091.00

    + Short Term Investments 16,304.00

    __________

    28,395.00

    So, that part is in line. However, we also need to look at the longer term investments.

    They had $47,761 in long-term marketable securties. That's defined as securities with a duration longer than a year. They're not as readily liquid, but its just basically them shifting cash to get a bit more yield.

    If you go to page 8 of their 10-Q you can actually get a good sense of where all this long-term cash is:

    $23 billion is in coprorate securities

    $2.9 billion is in munis

    $2.4 billion is in CD's

    $3.8 is in non-US gov securities

    $7.6 is in US agency securities

    $7.8 is in Treasury securities.

    Apple's a bit more conservative than its peers in its cash management. Their 2010 return was only 1%, Microsoft returned 3.7% on its cash during that time.

    You can read more about that here:

    http://www.fool.com/investing/general/2011/05/25/dont-do-it-...

    Hope that helps,

    Eric

  • Report this Comment On October 07, 2011, at 7:11 PM, nosocksjuststock wrote:

    Maybe I should not even comment; as I am probably the only person in the free world that does not own anything from apple. I started to buy a Mac once but found I would have to buy all of the programes that I used on PC again for the Mac. I just couldn't see the extra expense at the time. As far as the stock I see 3 options: 1.) Go ahead and buy or hold if already bought figering that the company is large enough to run itself regardless who is boss. 2.) Wait 3 to 6 months and keep a close eye on what happens to the stock and at the company. 3.) Dump the stock out of pure fear and check back to see if you were right in about a year.

  • Report this Comment On October 07, 2011, at 11:03 PM, huddaman wrote:

    Eric, Thanks for clarifying. I see it now on the balance sheet now. Also, the breakup you mention appears to be very liquid indeed. Corp bonds, treasuries, agency bonds, munis all are extremely liquid indeed. Since they only earned 1%, they are probably also very less sensitive to interest rate (short duration), which is another good thing. I will have to rethink my view on AAPL now. Thanks.

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