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 signals 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 January 3, 2022.
Amid the broad rally across the equity markets, the share price of Apple Inc. reached a new record level of US$199.62, giving the company a market capitalisation of $3.1 trillion. Incidentally, last week also marked the 43rd anniversary of Apple’s initial public offering (IPO), which took place on December 12, 1980, at a price of $22 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 April 1, 1976, and the company had a market capitalisation of $1.8 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 $0.10.
Essentially, this means that an investment of $10,000 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 $20 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 1990s 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 $150 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.
It is pretty remarkable that in August 2018, Apple became the first US publicly traded company to hit a value of $1 trillion
In order to demonstrate how Apple struggled for several years after the IPO, its market cap in 1997 was only around $2.3 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 six years. This was the start of the company’s revival and Apple’s market cap reached $5 billion in the early 2000s.
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 $75 billion to $100 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 $269 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 $500 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 $180 billion compared to an original cost estimated at just above $30 billion.
Basically, the average cost of Berkshire’s sizeable stake of Apple is circa $34 per share, compared to last week’s all-time high of $199.62. 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 $570 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 $1 trillion, and it only took two years to double in value to reach a $2 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.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2023 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.