Will Apple's Past Become Its Future?

It's been 15 years since Steve Jobs returned to the company he founded, and about one financial quarter has passed since he died. Talk of Apple's (Nasdaq: AAPL  ) long-term future has been at a fever pitch ever since Jobs stepped down in August, with two distinct camps emerging. The loyalists project massive growth and eye-popping numbers as far as the eye can see. Skeptics point to each new record-breaking quarter as a summit never to be surpassed again.

My view (which I'm sure many will dispute) lies somewhere in between. Apple's history shows that even average management can maintain a cutting-edge company for years without visionary leadership. But the technological advancements to come will be far more sophisticated and arrive more rapidly than they have in the past. Can anyone less than a visionary keep ahead of the rising curve?

Not quite lost in the wilderness
Apple wasn't cast adrift after forcing Jobs out in 1985. Under John Sculley, it simply failed to capitalize on longer-term trends in the computer industry. The company did well for some time, though. Despite the rise of IBM (NYSE: IBM  ) clone PCs, Apple continued to increase its computer sales into the '90s. At one point, Apple briefly pulled ahead of Big Blue to become the largest computer manufacturer in the world. It didn't last.

Apple hardly lacked for innovation during the Sculley period, either. Before his ouster, the company released one of the first commercially successful laptops, the PowerBook. Sculley was also instrumental in pushing development of the Newton, the predecessor to today's iPhones and iPads.

The company had multiple opportunities to license its Mac operating system before Microsoft's (Nasdaq: MSFT  ) Windows 3.1 took over, and it was even in talks to merge with several companies before finally acquiring NeXT. Had any number of situations turned out differently, Steve Jobs might have never been brought back to the fold, and Apple might have been just another also-ran computer maker.

Both sides of the coin
As the world's largest company by market cap, Apple would seem unlikely to double again. Its innovative position -- supported by a huge cash pile -- also makes it hard to imagine a steep drop. But major growth and financial distress both occurred in the years after Jobs was forced out, so it's worth thinking about how either scenario might come to pass now that his absence is permanent.


Source: Yahoo! Finance.

Apple 4.0: the rise
I don't think it's possible for Apple's stock to grow as much as it did in the early Sculley years (to say nothing of the past decade), but the company's made a sport out of trouncing the skeptics. Doubling its world-leading market cap is highly optimistic, but the idea can't be dismissed out of hand. I'd consider it to be the extreme bull case for Apple.

Apple could wind up with almost $200 billion in the bank after doubling again, unless Tim Cook finally decides to let the dividends flow. One executive has said that "the purpose of accumulating so much cash on our balance sheet was to demonstrate that Apple has the financial resources to pursue alternative technologies [and potentially acquire other companies]." That was John Sculley, back in 1986.

Apple could sell more than 180 million iPhones each year, almost enough for everyone in the United States over age of 21. Apple could also become the first retailer to sell five figures' ($11,000) worth of product for every square foot of its retail stores.

This assumes that the global smartphone market continues its exponential growth, that no other company will unveil compelling alternatives, and that Apple's margins will never be squeezed by hungrier competitors scrambling for market share. Smartphones may be replaced by form factors Apple hasn't envisioned, and Apple's lost out to competitors with more open platforms in the past.

Apple 4.0: the fall
There's no guarantee that the next five years won't play out more similarly to the '90s than the '80s. Apple's market share is far from locked up, despite its current popularity. Apple's iPhone sales last year were about 9 times what they were in 2008, but Sculley oversaw similar growth, from 300,000 Macs in 1984 to more than 3 million in 1989. Of course, Tim Cook's Apple has a major supply-chain advantage over Sculley's, so the comparison is hardly identical. Apple could maintain profitability with much fewer sales -- but all present arguments for continued stock appreciation must hinge on the ever-growing global demand for iStuff. Muddling along won't cut it.

A hundred million Windows phones could flood the market in the next few years, luring consumers away with low price points and high functionality. Other tablets could make the "Windows 3.1 leap" that caused consumers to notice Apple's lower-cost competition years ago. Public outrage at Foxconn labor practices could lead to a consumer exodus.

Apple is in a much stronger place than it was in the '80s, both on the balance sheet and in the product pipeline. But Research in Motion (Nasdaq: RIMM  ) and Nokia (NYSE: NOK  ) can attest to the uselessness of today's cash and technology in meeting tomorrow's threats. Nokia's hoard is now worth almost half its market cap, and RIM's name was once synonymous with smartphones. You won't find anyone calling RIM or Nokia execs visionaries today. I've yet to hear that label applied to Apple's current leadership team either, except in an anticipatory fashion.

One more thing ...
Ten years ago, the BlackBerry was one of the hottest phones around. The iPhone came out five years later, and RIM never recovered. Every new technology tends to take less time to reach wide adoption, so the smartphone era might not last as long as we think. Apple may not be able to rely on newer iPhone and iPad models for another five years before someone else's big idea steals the company's thunder.

I think Apple's position is secured for the next two or three years, but beyond that horizon, things simply can't be anticipated by outsiders. Don't fall into the trap of believing that today's technology will carry Apple into tomorrow. Even John Sculley recognized that innovative new devices were the key to the future -- but his big idea turned out to be too much, too soon.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of IBM, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of and creating bull call spread positions in Microsoft and Apple. 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.


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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, 2012, at 7:07 PM, bsimpsen wrote:

    While I don't disagree with your general thesis, you you make some weak points. Current Apple has a supply chain advantage over Sculley's Apple, but it also has a supply chain advantage over just about everybody. This makes it difficult for "lower cost" competitors to the iPad. If Apple wants to go to war on price, they'll be the only one left standing.

    The first time Steve Jobs left Apple, nobody understood all the things that differentiated his thinking from "the rest of us". We still probably don't, but Steve had 15 years to make sure that Apple would learn as much and forget as little as possible about how he thinks.

    As for the exodus from Apple because of Foxconn, where will they run? To competitors who don't police Foxconn as thoroughly as Apple? To companies using Quanta, who's labor practices are worse? Will we give up our gadgets altogether, tossing the Chinese workers back into the fields and ourselves back into recession?

    So, do I think Apple can double in size from here? Absolutely. I won't put a date on that event, but believe it will happen.

  • Report this Comment On January 31, 2012, at 9:33 PM, jdwelch62 wrote:

    Great article, Alex! You've injected some reasonable and rational thought into what has otherwise become a very emotion-fueled discussion. Every race has a lead horse, and right now it's Apple in terms of technology. But unlike horse races, the technology race doesn't really end. It's unrealistic to expect that a competitor won't or can't overcome Apple at some point. I think a lot of people who post Comments on MF articles about Apple are too emontionally connected to Apple's current string of successes; they are cultists, if you will, worshiping at the alter of the Church of Apple. As an Apple shareholder, I hope they continue to do well, but it's not realistic that they'll double in market cap any time soon. Possible, just not terribly realistic. 5 years ago the iPhone didn't exist, and 5 years from now is a really long time in terms of technological progress. Thanks for injecting some reality into this discussion!

    Fool on!... :-)

  • Report this Comment On January 31, 2012, at 10:16 PM, lucasmonger wrote:

    Apple may double faster than the media and analysts can imagine. While everyone else is trying to catch up to Apple with tablets and smartphones, I'll bet Apple is indeed working on the next best thing (or next best 5 things).

    An interesting tidbit, thousands of Chinese are lined up in front of Foxconn earlier this week hoping to land a job, they start to earn a good wage and go out and buy an iPhone causing a vicious cycle.

    What the world may consider as questionable labor practices needs to be taken in perspective... the work many people were doing before starting at a factory was probably harsher and paid less. What seems appalling to us may be perfectly legal, acceptable, and even desired by the Chinese. Remember when the Soviet Union was so scared of the Chinese? The Chinese could send 2 million unarmed men running across the Soviet border and literally mow the Soviet soldiers down as they run out of bullets. Life in China is tough, and they just don't think the same as we do.

  • Report this Comment On January 31, 2012, at 10:23 PM, lucasmonger wrote:

    @InfoThatHelp

    It wasn't a Mac III, it was an Apple III computer, the successor to the Apple II, Apple II plus, Apple IIe that was a miserable failure. Steve didn't like the Apple III as he was working on the Mac when other parts of Apple were working on the Apple III. Interestingly enough, it was one of the early computers with a hard drive... but at a time when it was way too expensive for the masses (like flash based MP3 players before the iPod).

    Another tidbit. The Lisa wasn't Steve Jobs's project. John Sculley and others were working on the Lisa and Steve pulled together a rogue team to build the Mac. You might want to take a quick read of Guy Kawasaki's "The Macintosh Way - The Art of Guerrilla Management" for some of this history.

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