Apple Stock Parties on as the iPhone Celebrates its 5th Birthday

By BA McKenna - July 2, 2012 | Tickers: AAPL, GOOG | 0 Comments

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I’d imagine the iPhone’s 5^th b-day bash is still going on. That iPhone, born on June 29, 2007, is one lucky gadget. Its parent, Apple (NASDAQ: AAPL), is not only rich, but also spends a lot of quality time with it. Ditto with its siblings, the Mac, iPod, and iPad. Apple TV has been a bit of the black sheep of the family, but it seems Apple is finally showering it with more attention.

I could personify and pun on as the iPhone and pals party on, but let me get right to the points of this article.   

Agenda of Article

1. Use Apple stock as an example to show that conventional wisdom -- about when it’s too late to buy a high-quality winning stock -- is often wrong.
2. Use Apple stock to show that conventional wisdom -- about a stock's past under-performance being indicative of likely future under-performance -- can be wrong.  

Point 1: Superstar Stocks Often Party on Longer than Expected

Superstar stocks often continue their winning runs long after conventional wisdom has declared them “overpriced" or “due for a drop after such a price run-up.” Let’s be clear – I’m not talking about winning stocks during market bubbles, as that phenomenon is largely explained by "irrational exuberance" or greed. I’m talking about high-performing stocks during non-bubble times; top-quality companies with not only actual earnings, but substantial earnings. (Yes, I know that brings up the question: How do we know this is or is not a bubble? Read several Foolish takes on the topic here.) 

Over the years, I’ve heard and read this phrase a lot: “It's too late to get into X stock.” Apple stock pops up a lot in this context because it’s so well-known. So, I thought it would make for a perfect stock to illustrate this, as well as my second, point.  

Jump Back to June 2007: iPhone is Born

If you’re like a lot of investors, when Apple released the iPhone in June 2007, you may have thought it was going to be a winning product, BUT it was too late to get in on Apple stock. After all, you perhaps reasoned and were definitely beat over the head by financial “experts” telling you, Apple stock was already up 113% ($57.27 to $122.04) over the past 1-year period and — gasp! — 1,331% ($8.53 to 122.04) over the past 5-year period. Surely, a stock that had risen so much so quickly was due for a steep fall rather than continued winning performance, right?

Wrong.  Apple stock went on to return 378% in the 5 years since the iPhone release (vs. a loss of 9.4% for the S&P 500).

Point 2: Superstar Stocks Aren't Necessarily Born -- They Might be Late-Bloomers

Just as a party often takes awhile for the fun to really get going, a stock can also take awhile for its returns to really start flowing. Unlike Google (NASDAQ: GOOG), which turns 8 years old (as a public company) on August 19, and has returned 478% since its IPO, this was true of Apple. 

Relevant conditions -- both internal and external to a company -- can slowly or quickly change. And then, too, can the prospects for the company's stock. Internal conditions include such things as new products and new top management. External conditions can be related to competitors and customer demand, among other things. 

In the case of Apple, the conditions that changed included the two internal ones I mentioned. Steve Jobs returned to the company in 1996 after an 11-year absence, and Apple began introducing entirely new product lines. 

Jump Back to November 2001: iPod is Born

The iPod was born (released) on Nov. 10, 2001. Had you heard that the fat lady -- or any gendered person of any width -- sang on an iPod that day, you might have realized that for Apple's stock, the party had actually just begun.

Apple stock closed at $9.38 the day of the iPod release. Its IPO was in December 1980, with a split-adjusted IPO price of $2.75. So it only delivered relatively small returns over its 21-year existence as a public company, despite this period coinciding with one the two biggest bull markets in history (total annualized return of S&P 500 from 1981-1999 was about 18.2%). 

You may have known about the Mac users' ardor for their computers, founder Steve Jobs' return, and believed the iPod was going to be a winning product. After all, it was a significant improvement over the clunkier -- yet wildly popular -- Sony Walkman. BUT, you perhaps listened to conventional wisdom or reasoned that Apple's stock, despite the initial IPO hoopla, had significantly underperformed the market for soooo long, surely it would continue to under-perform, right?

Wrong.  Apple stock went on to return a jaw-dropping total return of 6,126% since the introduction of the iPod (vs. 21.6% for the S&P 500). $1,000 invested just over 10 1/2 yrs ago would now be worth $62,260. And had those who purchased that first iPod ($399) bought Apple stock instead, they'd be richer to the tune of $24,841. And there were plenty of early iPod buyers: 600,000 units were sold through 2002. 

The Numbers

This table shows the data discussed above, as well as other numbers that correspond to buying Apple stock on the day (or first trading day after if the market is closed) of various major product releases. The data here is included to support the two key points; it's not meant to suggest market timing -- it was just "neat" to use product launches as stock buy points. 

(Release dates are US release dates; stock prices are split-adjusted; data as of 6/29/12.)

Take-Home

While I used Apple stock as an example, the points of this article relate to stocks in general: 

1. High-quality winning stocks often continue to outperform longer than many expect.

2. A long-time ho-hum stock can turn into a superstar relatively quickly.

Apple Stock Going Forward???

I believe Apple stock will continue to party on. 

Stay tuned for an quantitative and qualitative analysis showing why Apple stock is still a 'Buy.' 

Trivia Note: The iPhone shares its b-day week with Atari (born June 28, 1972), maker of the iconic Pong (1976), which ushered in the video gaming era. A common link: Steve Jobs briefly worked at Atari soon before founding Apple. Read an interesting piece here. Happy 40th b-day, Atari! 

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