Remember when Apple-ites were crazy cultists whose computers would end up in the museum next to the Commodore 64s? I may be typing on a MacBook Air right now, but in the early 2000s, Apple
Yet the signs of a turnaround were there. Here's what I saw, and here's how I missed the Red Delicious.
BusinessWeek recently reviewed the company's history before Jobs' 1997 return:
It's difficult to remember how far Apple had fallen. Just a few months away from bankruptcy, the company had a dwindling 4 percent share of the PC market and annual losses exceeding $1 billion. Three CEOs had come and gone in a decade; board members had tried to sell the company but found no takers. Two months after Apple's deal with Microsoft, Michael Dell told a tech industry symposium that if he ran Apple, he'd "shut it down and give the money back to shareholders."
The "deal" with Microsoft
Gates and Dell's
I was far more interested in companies with "real" tech futures -- companies like ARM Holdings
I thought, Why bet on software or boxes when you could have the high-margin licensing income? Uh, maybe because companies like Nokia
Yes, I owned them each once, and no, I didn't make any real money.
Hidden in plain sight
Instead of projecting potential license fees from customers who didn't want to pay them, I should have seen what was in front of my eyes. By the time the second iPod with the touch-sensitive wheel came out in October 2002, it wasn't just an early-adopter geek toy. No longer did just a couple of Motley Fool techies have one, but people throughout the company and friends outside. Even I could tell the margins there and with the iTunes music store were great and sales ramping.
But apparently "telling" didn't translate into my rubbing two brain cells together. And there's more.
The meat of the metrics
I didn't know the market was at a bottom from fall 2002 to March 2003, but I'd had enough valuation schooling to see cheap and good opportunities. For part of my portfolio, I was buying cash-rich, free-cash-flow neutral to positive companies for less than two times cash -- the better the business, closer to two; the worse, one and under. It worked out well in the coming bull market, but the key was the process: The protection was there if the market had done nothing.
Apple turned free-cash-flow positive in the quarter ending Dec. 2002, and with two exceptions, never looked back. No one could foresee the future, but the ramping product and music sales meant something.
Plus, shares were at two times net cash, in the low-to-mid teens with quarter -- with $6.15 in cash per diluted share -- around 50% of the market cap. It fit my profile, but I didn't put it on.
Allocation and risk management
It would have made sense to allocate maybe 3% to the opportunity -- not enough to permanently damage the portfolio if Apple turned out to be a crabapple and dropped toward cash it would be burning. But it would move the needle, if -- as happened -- Apple ripened into the tasty Honeycrisp of a cash-minting maker of visionary life-changing products.
Sure, I would have sold at some point on valuation grounds. That's what I do. But in late 2002 and early 2003, the odds were very good indeed for fine return against reasonable risk. My process has evolved, but I stick to it. Then and now, you can't win if you don't trust it and play.
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Tom Jacobs is the advisor of Motley Fool Special Ops, a special situations and opportunistic value service that invests mostly in Justin Bieber trading cards. You can email him, follow him on Twitter @TomJacobsInvest, and for a sleep aid, read his other columns.
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