Monday, January 17, 2011

Gravity of Jobs' Illness Says Apple to Fall

With a bad pancreas and a transplanted liver, it looks as though Jobs' days are numbered. However, it's most likely his days as Apple CEO are many fewer than his total days remaining. Without its Chief Visionary, Apple will drop from the lead to become one of the pack.

With Jobs on Leave, Will Apple Shares Stay Healthy?

Oh, brother.

The news that Steve Jobs is taking another medical leave from Apple is ominous.

Everyone wishes the Apple chief executive the very best. Let's hope this is temporary and he will make a speedy recovery. Apple says Mr. Jobs plans to continue as chief executive while on leave. That sounds hopeful. We will may find out more tomorrow, Tuesday, when the company reports its latest earnings.

But right now investors are flying blind. Just how sick is Mr. Jobs? How long will he be out? We don't know. Apple won't say. Mr. Jobs has asked for privacy. On a personal level, anyone can understand that. But it's no help for stockholders.

Apple stock fell about 6% in overseas trading Monday following the news. But this was a light day for the European markets. Wall Street was closed for Martin Luther King Jr. Day. One can expect a more meaningful reaction here in the U.S. when the markets reopen. Investors will have to digest the news about the chief executive as well as the latest earnings for the Christmas season.

What can you expect? If this turns out to be a temporary leave of absence, for comparatively minor medical reasons, then this shouldn't have much effect on your shares. Who cares if Steve Jobs has to work from home for a couple of months?

But if the absence is longer and the problem more severe, it's another story.

How important is Steve Jobs to Apple? Ask yourself this: If you had woken up today and learned that Steve Jobs had left Apple to join Sony as chief executive, with a big stake in that company, would you be inclined to buy Sony stock? I bet you would.

If you had woken up to learn that Steve Jobs had moved to Motorola under similar terms, would you want to go out and buy some Motorola stock? I bet the answer's the same.

In the past 13 years, Steve Jobs has proved himself to be the most extraordinary chief executive in the world and among the most extraordinary in living memory. His leadership adds enormous value. Therefore his absence must subtract enormous value. That's grade-school arithmetic. There's no way around it.

Look at where Apple was before he resumed the helm back in 1997. When his predecessor, Gilbert Amelio, stood down in July 1997, the shares were the equivalent of $3.34 apiece in today's terms. On Friday: $342. A hundred times more.

Apple true believers may argue that the company will continue to succeed, regardless of its leadership, because of its superior technology. Yet Apple computers were better than PCs back in 1997, as they were in 1987 and as they are today. But the company was still heading for oblivion. Technological brilliance is not enough to make stockholders rich. You need management brilliance too. Steve Jobs has given Apple a focus and an edge that is matched by few other companies. This is a fast-moving, brutally competitive industry. Last year's cutting-edge gadget is next year's paperweight. The iPad is already heading into history, and though the iPad II is on deck, a boatload of rivals is just about to land.

The difference between winning and failing in this industry is paper thin. Companies like Nokia and Sony have struggled in recent years not because of a few, big, obvious blunders that were easy to avoid, but because of the cumulative effect of lots of small errors over time. Tim Cook, the interim chief executive, may do a perfectly good job. Whether he will prove as brilliant as Mr. Jobs is yet to be seen.

Two years ago, when Steve Jobs left to get a liver transplant, Apple stock briefly fell about 5% or so. It was a blip. The stock then quickly rebounded and hit new highs. Some investors may take heart from that and figure history will repeat itself.

But a lot has changed since then. The situation today is very different, and riskier.

Back then, Apple stock was a lot cheaper. It was only around $85 a share, or about 2.3 times sales, five times cash flow. Today, shares cost $340, five times sales, and 17 times cash flow. Then, Apple was valued at $50 billion net of cash. Today it's $294 billion.

Today all but one analyst on Wall Street has it as a "buy" - a degree of near-unanimity that is ominous. History has not been kind to the stocks that every analyst loves.

Naturally, the company enjoys enormous strengths with or without Steve Jobs at the helm. It effectively controls an entire technological ecosystem - iPhones, iPads, Macs, iTunes, and applications. At about 17 times forecast earnings, the stock is not grossly expensive. It has net cash and is a cash machine. Many customers are apparently impervious to price, and significant growth potential remains, especially overseas.

Yet Apple now carries a $300 billion price tag. It's pretty hard to make a company that big grow. Last week I confessed I had been too cautious on Apple stock in the past 18 months. And I asked what it would take for me to keep being wrong. If Apple continued to rise at the same rate, I wrote, it would be heading for $1,000 per share in a couple of years. Could that happen? If so, how?

Sheer numbers showed how big the challenge is. Apple investors would need an absolutely heroic performance from the company for something like that to take place. Bluntly, I wouldn't bet on it, although of course many will. (As I also mentioned, history suggests that "Could Apple could go to $1,000" is the sort of question people like me tend ask at the peak of a stock's fortunes.)

Steve Jobs's health has long been a concern in the background for Apple stockholders. If you are an investor in Apple, congratulate yourself on your good fortune, but be aware of the risks. They are rising, not falling. And this, alas, is another one.

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