Apple – From USD10,000 to USD20 million

Article #830 by Edward Rizzo - Published Weekly

The year-end rally across equity and bond markets intensified last week following clear indications by the Federal Reserve that it would not raise borrowing costs again and signalled that it expected three quarter-point rate cuts in 2024. The benchmark 10-year US Treasury yield fell below 4% for the first time since August (after reaching a multi-decade high of over 5% only a few weeks ago) and Germany’s 10-year Bund yield slid to its lowest level in nine months.

The Dow Jones Industrial Average index reached a new record level of over 37,000 points following the statement by the Federal Reserve while the S&P 500 index edged closer to surpassing its previous all-time high of 3 January 2022.

Amid the broad rally across the equity markets, the share price of Apple Inc reached a new record level of USD199.62 giving the company a market capitalisation of USD3.1 trillion. Incidentally, last week also marked the 43rd anniversary of Apple’s Initial Public Offering (IPO) which took place on 12 December 1980 at a price of USD22.00 per share.

Being the largest company in the world, it is interesting to review the main milestones of the company as it can shed some important messages for the investing public.

Steve Jobs and Steve Wozniak founded Apple Computer on 1 April 1976 and the company had a market capitalisation of USD1.8 billion at the time of the IPO in 1980. Since the company has performed five share splits over the years, the adjusted IPO price for comparative purposes is equivalent to just USD0.10.

Essentially, this means that an investment of USD10,000 via the purchase of 454 shares in 1980, which would have increased to 101,696 shares today after the five share splits, translates into a current value of over USD20 million. This figure does not take into account any dividends paid over the years. While the returns to shareholders have been truly extraordinary, it has not been a smooth ride from the start and most of these gains materialised several years after the IPO.

In fact, from the beginning of the 1990’s until mid-1997, Apple suffered a loss of competitiveness as its products lacked consumer appeal leading to a marked decline in sales. Few investors may recall that Apple was allegedly 90 days away from declaring bankruptcy in 1997. The company was reportedly ‘saved’ by Microsoft. Steve Jobs, who had been ousted in 1985, and was re-hired and named interim CEO of Apple in 1997, had negotiated this important deal with Bill Gates who at the time was the CEO of Microsoft. The deal involved a payment of USD150 million by Microsoft with Apple agreeing to drop a lawsuit against Microsoft. Moreover, Apple in turn agreed to set Microsoft’s Internet Explorer as the default browser on its Apple Mac computers. Microsoft also agreed to support Office for the Mac for a five-year period.

In order to demonstrate how Apple struggled for several years after the IPO, its market cap in 1997 was only around USD2.3 billion, not much higher than it had been during the IPO in 1980.

In 2001, the iPod was unveiled which proved to be an instant success as the company sold over 100 million units in 6 years. This was the start of the company’s revival and Apple's market cap reached USD5 billion in the early 2000’s.

However, the game changer for the company was undoubtedly the launch of the iPhone in 2007. Apple created the concept of the smartphone and on the same day that the iPhone was announced, the company also changed its name from Apple Computer to Apple Inc. During the year of the iPhone's launch, the market capitalisation of the company jumped from USD75 billion to USD100 billion. Over the past 16 years, Apple has reportedly sold more than 2.3 billion iPhones, making it one of the most successful and profitable products of all time.

This was followed by the launch of the AppStore in 2008, which is the company's biggest revenue generator in its services area today. In 2010, Apple unveiled the first iPad and in the same year Apple surpassed Microsoft’s market capitalisation for the first time. At the time, Apple was worth USD269 billion, making it the third largest public company in the world behind the oil and gas giants PetroChina and Exxon Mobil.

Despite the significant upturn in the company’s share price between 2008 and 2016, this did not deter Berkshire Hathaway from starting to invest in Apple in 2016 when it had a market capitalisation of around USD500 billion. Although at the time Warren Buffett was criticised for this move since some commentators believed that the valuation of Apple was too steep, this was one of Berkshire’s most successful investments to date. In fact, Berkshire's stake in Apple is currently valued at over USD180 billion compared to an original cost estimated at just above USD30 billion. Basically, the average cost of Berkshire sizeable stake of Apple is circa USD34 per share compared to last week’s all-time high of USD199.62. Berkshire Hathaway is the third largest shareholder of Apple with a stake of 5.87% of the issued share capital. Berkshire’s stake in the company has grown rapidly as a result of the aggressive share buybacks conducted by Apple over the years. In fact, since 2012, the company has repurchased in excess of USD570 billion worth of its share capital.

While in the first 20 years after the IPO, Apple’s share price suffered as a result of the company’s weak performance, the major upturn happened in the past 20 years. In fact it is pretty remarkable that in August 2018 Apple became the first US publicly traded company to hit a value of USD1 trillion and it only took two years to double in value to reach a USD2 trillion market cap. This clearly shows how a company’s fortunes can change over time. It is therefore important for investors to understand the long-term vision of a company’s management team, the strategic opportunities and competitive advantage of a company as well as the industry dynamics in which it operates before taking any investment decisions.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.