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Can Apple Stock Avoid the Microsoft Syndrome?

Companies / Apple Apr 28, 2014 - 11:09 AM GMT

By: Money_Morning


David Zeiler writes: Although Apple Inc. (Nasdaq: AAPL) stock is up about 8% today on the strength of an earnings beat and several shareholder-friendly announcements, the real question is whether the tech giant can keep the stock moving higher.

Veteran Apple enthusiasts and many AAPL shareholders would be loath to admit it, but Apple today is in just about the same position where Microsoft Corp. (Nasdaq: MSFT) was in 2000.

And unless the Cupertino, Calif.-based company can find a different path, it could find itself stuck in the same trap - a company making mountains of money with a stock that stayed flat for more than a decade.

The similarities between Apple now and Microsoft then should be keeping Apple Chief Executive Officer Tim Cook up at night.

In the 1990s, the Redmond, Wash.-based software powerhouse experienced phenomenal growth, and Microsoft stock rose accordingly. From 1990 to 2000, MSFT rose more than 10,000%.

But in the decade that followed, despite relentless growth, MSFT stock went nowhere - literally.

From late 2001, after the dust settled from the dot-com bust, to the end of 2012, Microsoft shareholders had little to show for their investment but a steady stream of modest dividends.

Now look at Apple stock. From October 2001, when the first iPod debuted, to its peak in September of 2012, AAPL stock rose more than 4,200%.

Apple stock went on a rocky ride after that, but has settled into the $500 to $575 range over the past six months.

Tim Cook said during yesterday's earnings conference call that he thinks Apple is undervalued, and he's probably right.

But getting investors to agree is not going to be easy. Let's go back and take a look at what Microsoft did during its lost decade.

Why Big Numbers May No Longer Help Apple (Nasdaq: AAPL) Stock

In its 2000 fiscal year, Microsoft earned $22.96 billion in revenue and net income of $9.42 billion.

The dot-com bust hurt earnings for a few years, but by 2004, Microsoft was up to $36.84 billion in revenue and net income of $8.17 billion. After that, business picked up considerably.

In 2006, Microsoft earned $44.28 in revenue and $12.60 billion in net income. MSFT stock didn't budge.

Two years later, Microsoft revenue eclipsed the $60 billion mark - nearly triple where it had been in its 2000 heyday - and net income had nearly doubled to $17.68 billion.

After a weak 2009, earnings growth resumed, and by 2011 Microsoft was up to $69.94 billion in revenue and net income of $23.15 billion

For such a large company, that's pretty respectable growth, but Wall Street remained unimpressed year after year.

And a big part of the reason was that Microsoft, under CEO Steve Ballmer, was content to milk the cash cow products of Windows and Office without setting any bold new initiatives. Even its successful foray into gaming, the Xbox, took a long time to contribute anything to the bottom line (and even now is but a minor contributor).

Another problem was the Law of Large Numbers. Microsoft grew revenue 12-fold in the 1990s, but just by a factor of 2.5 in the following decade. The bigger you get, unfortunately, the harder it is to post dramatic growth numbers.

When you get as big as Microsoft in 2000, and Apple in 2012, only a major new product or strategy shift becomes enough to keep pushing your stock price higher.

Ballmer could have invigorated Microsoft stock, for instance, had he jumped on the mobile wave back in 2007 when the iPhone arrived. Instead he ridiculed the iPhone and let the mobile revolution pass Microsoft by.

Tim Cook is much smarter than Ballmer, but he still faces a tremendous challenge in finding Apple's Next Big Thing - some sort of revolutionary product or service that will produce a new and rapidly growing revenue stream.

That's what the iPod (and iTunes) did in 2001, the iPhone in 2007, and the iPad in 2010.

Apple might even be on the verge of announcing such a thing - be it a health-monitoring smartwatch, or some dramatic improvement to Apple TV, or something in the mobile payment space.

No matter what Apple comes up with, however, it will have to be something with a massive impact to avoid the Microsoft Syndrome and get Apple stock back to its all-time high and beyond.

Do you agree that Apple needs a blockbuster product for Apple stock to break out to its former highs? Or do you think organic growth of existing products will be enough? Tell me off on Twitter ;@moneymorning or Facebook using #Applestock.

Source :

Money Morning/The Money Map Report

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