February 5, 2013
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The only question now is whether Apple is just going through a short-term transition, or is slowly becoming a modern-day version of its long-time nemesis Microsoft.
Jeff Macke, founder and president of Macke Asset Management and CNBC contributor, January 25, 2013
The idea that Apple might be the next Microsoft strikes primal fear into the hearts of Apple shareholders. The nightmare is reinforced by an eerie similarity between Apple’s recent stock price chart and a December 1999 chart of Microsoft when the stock peaked at $58; it subsequently dropped to $22 in a year and then wandered aimlessly between $17 and $36 for the next 13 years.
The bad news for Apple shareholders is that Mr. Market is signaling an important inflection point in the company’s business. The peak in Microsoft stock correctly foreshadowed a future for the company characterized by slower growth, heightened competition and more frequent strategic blunders. The message implied by Apple’s slumping stock price may prove equally prescient.
It makes sense that it would. Slower growth is inevitable. Competitors are gaining ground on Apple, most notably Samsung. And Apple’s embarrassing attempt to replace Google Maps with a totally inadequate home-grown version serves as an important warning for future strategic gaffes. The company’s rumored entry into the television industry (Apple TV) may be another mistake on the horizon.
However, investors’ fears over a sluggish future for Apple’s stock are misplaced. Even as Apple’s business succumbs to the same economic forces that humbled Microsoft a dozen years ago, the future for Apple’s stockis vastly more hopeful. This is because the initial conditions for Apple’s stock in 2013 are totally unlike the conditions were for Microsoft stock at its own inflection point in 1999.
The difference is valuation. Apple’s stock is currently priced at 10.4 times its earnings per share over the past 12 months. Microsoft was valued at 75-times earnings in December 1999. The dismal performance of Microsoft’s stock beginning in 2000 is not a cautionary tale for Apple; if Microsoft could have been purchased then at a multiple as low as Apple’s is today, an investor would have substantially outperformed the S&P 500.
Assume you could have purchased 1,000 shares of Microsoft in January 2000 at an “Apple multiple” of 10.4 times earnings, instead of the actual multiple of 75 that prevailed at the time. The investment would have cost you $7,280. Assuming reinvestment of dividends during the ensuing years, you would now own 1,643 shares of Microsoft worth approximately $43,880, representing a cumulative return of 870% over 13 years. For context, the S&P 500 Index delivered a cumulative return of 30% over the same period, also including dividends.
Price matters. Microsoft’s business and progress over the past 13 years did not justify the initial conditions of its stock price at the beginning of the period. Yet a hypothetical purchase of the stock at a modest price-to-earnings multiple – like the one that prevails for Apple today – produced a spectacular hypothetical result for the stock from the same underlying fundamentals for the business.
Here’s why: Over the past decade Microsoft’s business produced an average return on total capital of 31.9% per annum. Whatever your estimate of the company’s cost of capital, it is way below 31.9%, which means Microsoft’s business model created economic value over time — a lot of it.
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