Apple: The Best Revenge Is Living Well (Fool on the Hill) January 20, 2000

An Investment Opinion

Apple: The Best Revenge Is Living Well

By Bill Barker (TMF Max)
January 20, 2000

"What can I say? I hired the wrong guy."
-- Steve Jobs on John Sculley, the man who fired Jobs from Apple in the early '80s. Triumph of the Nerds.

You know that cool "CEO Wealth Meter" that is ensconced on our Quotes page? The one that shows you throughout the day how many tens and hundreds of millions of dollars richer or poorer big-shot CEOs are becoming off their stock holdings? For some reason, Steve Jobs wasn't listed as one of the big movers on that list today, though he really should have been. By my calculations Jobs was richer today to the tune of between $70 and $150 million, though he finished the day at the low end of that range. If our data provider were fully up to snuff, clearly that would have had Jobs' name being even more read today than it was already.

I should back up a bit because some of that may need just a little bit of explaining. As you may or may not have noticed by now, the company that until recently was known as Apple Computers, Inc. but is now simply known as Apple (Nasdaq: AAPL), last night announced some very solid results for the quarter just ended. Earnings per share came in at $1.00 per share, significantly ahead of expectations of $0.90 per share. Sales for the iMac and iBook computers were particularly impressive. Revenue growth was up 37% and unit growth was up 46%, though margins were off a little bit due to higher DRAM pricing. In response to the whole package, Wall Street's analysts spent the early morning tripping over themselves to be the one singing Apple's praises the loudest, with virtually all the analysts raising their price targets and earnings estimates on the company.

Along with the earnings news came the announcement that Apple was finally going to start paying its CEO, Steven Jobs, something for all his hard work. For the last couple of years, since he returned to the helm of Apple in 1997 after his banishment about 14 years ago, Jobs has been getting by somehow on a salary of $1 a year. Some of that changed yesterday, as the company decided that Jobs deserved to be paid a little more. Though Jobs' official salary is still $1 a year, that does now come with a bit of a sweetener as the board granted Jobs options to purchase 10 million shares of the company, and tossed in a Gulfstream V jet into the package as well. With the company's share price rising some $7 for the day, those options on the 10 million shares are worth about $70 million more than they were yesterday.

An option to purchase 10 million shares isn't exactly chicken feed for a company that only has 170 million in shares outstanding, but the work that Jobs has done for Apple since returning in 1997 certainly deserved some sort of major thank you. The share price of Apple has moved from the low- to mid-teens level in mid-1997 up to today's level of $113 or so, and the market capitalization for the company has moved up from about $2 billion to just under $20 billion over the time period that Jobs has been back at the helm.

Thinking about a $2 billion market cap for Apple only two and a half years ago is mind-blowing. This is a company that today has more cash in the bank than that. Tossing in Apple's holdings in Akamai Technologies (Nasdaq: AKAM) and ARM Holdings (Nasdaq: ARMHY), and Apple has about $5 billion in cash and equities that it's sitting on. That means that Apple still has an enterprise value of only $13 billion, which translates to about $80 a share. With earnings for this year expected to be in the range of $3.45 a share or so, that means the company still is trading at an enterprise value of around 25x operating earnings.

That's not exactly pricey in this market, as you probably know, especially for a company renowned for its technological acumen. Perhaps the comparatively cheap valuation that Apple still has, despite being up over 800% in the last three years, is that it's kind of the anti-Internet stock. That is, unlike any number of Internet companies that grow sales and grow losses simultaneously and aggressively, and are rewarded by the market either because of or in spite of that fact, Apple has been growing earnings and trimming sales instead. Revenue for the last four fiscal years looks like this:

1996  $9.833 billion
1997  $7.081 billion
1998  $5.941 billion
1999  $6.134 billion
As you can see, there is by now a turnaround in the top-line for Apple, but the turnaround in the stock price occurred well before the turnaround in revenue growth. That's something to keep in mind the next time you read analysis that gets too gung-ho on the revenue growth of some start-up companies. Growing revenue isn't the hardest (or smartest) thing in the world for every company to do -- it's growing revenue profitably that is the challenge. In some cases, you need to slash top-line sales massively, as Apple did in 1997 and 1998, to return to actual bottom-line conversion. Apple isn't expected to return to 1996 levels of sales until 2001, and yet it has obviously been pursuing a superior business plan to a simple growth-of-market-share-at-all-costs strategy.

Of course, to call Apple "the anti-Internet company" is in all other respects completely misleading, as it is the Internet generally, and the iMac specifically, which has returned Apple and its shareholders to fiscal health. Though I've seen articles today that continue to raise questions about what Apple does for its next trick, I would have thought that an Internet that becomes more and more based on delivering visual content is right up Jobs' alley. What with his success in developing Pixar, and the visual orientation of all of Apple's major successes, it seems to me that we're now entering the sweet spot of the cycle for a visual visionary such as Jobs.

We'll see, but in the meantime, the next time he's riding along in that Gulfstream jet, Jobs can savor the revenge of living well. He's earned it.