Microsoft's $10 Billion Blundered Apple Trade
Marc is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft Invests in Apple!
Way back when, Steve Jobs announced that Microsoft (NASDAQ: MSFT) would be making an investment of 150,000 shares in Apple (NASDAQ: AAPL) (Series A, non voting, convertible preferred stock) worth around $150 million. These shares would have been convertible after a period of 3 years into common stock at a conversion price of $8.25. By 2001 all shares had been converted into Apple common stock, and in 2003, were all sold by Microsoft
After all shares were converted Microsoft spent about $151 million for 18.2 million shares of Apple stock at the conversion price. Today with Apple stock at $610/share it would now be worth $11,102,000,000 ($11.1 billion dollars). Quite a nice gain! It shows that buy and hold does work. That represents a gain of over $10 billion more than they sold their entire stake for.
Money Left on the Table Hurts
Microsoft has to be kicking itself for not holding on to this position and leaving over $10 billion on the table for essentially doing nothing but holding onto Apple stock over the nine years since they sold. Additionally with a $10.65/share annual dividend by Apple, the amount Microsoft would receive annually from Apple would have been $193,830,000 ($193 million bucks). Ouch! So from $150 million dollar investment they would be raking in almost $200 million annually in dividends and sitting on a staggering capital gain. I'd call that a home run that never was.
Of course hindsight is always 20/20 in investing. This stock liquidation was one enormous blunder though by Microsoft. They didn't have to sell as they have always had plenty of cash on the balance sheet sitting there and doing nothing. At a cost basis of $8.25 they would be sitting on about a 74 bagger in just nine years. Apple has been one of the best performing stocks over the last ten years. Microsoft had the big fish on the line and threw it back. I'm sure if they could go back in time they would have held onto every one of those Apple shares with a death grip.
Would Microsoft Invest Again for an Even Better Bargain?
At today's valuation, Apple actually represents a better value and LESS risk than when Microsoft invested that original $150 million. At the time of the investment, things looked quite dire for Apple. They were almost on their deathbed. Those were dark days.
If Microsoft invested in Apple back then one has to wonder why wouldn't they hedge their bet again today and put some money on what appears to be the winning horse? Perhaps Steve Ballmer's pride or some perceived conflict of interest. The same conflicts existed in 2000 as they do today so perhaps that is not based on anything real. That said, I would bet we won't see Microsoft putting any money into Apple again (the company or the stock).
As an investor you can also catch opportunities early. Instead of tossing the fish back in the water you can hold on tight. Watch the company grow over long periods of time. At some point you might see a dividend issued that exceeds your initial investment in the company as Microsoft would have in the above example. Those are the rewarding ones and they are out there today waiting for you to find them.
Find them Early and Let them Grow
I've used Motley Fool's website and newsletters to uncover ideas and companies that I've never heard of before. My hope is if I never heard of them maybe most people have not yet either. When everyone finds out that is when the big gains are made. Some of these companies I discovered on Fool.com have gone on to be home runs for me and have grown into my largest positions.
For example, I bought Chipotle at an average of $47/share and Intuitive Surgical at an average of $158/share. They now trade at $383 and $560 respectively. Maybe in five or ten years there might be a dividend that is close to or exceeds my actual cost basis. When I first saw each of these companies I literally never heard of them but it gave me a starting point to start doing research and homework on them. Now I have a thorough understanding of each company, track the quarterly numbers and listen to the conference calls without fail. I do this to make sure I don't make a horrific blunder and in ten or twenty years look back at a costly sell.
I Blundered Apple too Back Then
In another bit of irony I too have blundered in Apple stock, but was smart enough to know it and recover. I owned 2400 shares of Apple at a cost basis of just over $8. So for my cost basis of about $20 grand it would be worth almost $1.5 million today. Additionally, I'd be getting an annual dividend of $10.65 (over $24,000 per year) which was more than my cost basis! I sold half my shares at 42 and the rest at 64 in order to fund a swimming pool. I now tell people that pool cost me almost $1.5 million! A very expensive pool indeed.
I too should have held on tight. I got a lucky break when the market melted down in 2008 and went in big as the stock dropped towards $80/share and have held on since. Another lesson here is to take advantage when Mr. Market gives you a second chance to buy the great ones when everyone else is panic selling indiscriminately. It will be some time until Apple's dividend exceeds my cost basis but perhaps in this decade or next it will get there.
For more of my financial insights, opinions and stock analysis check out my blog: www.oracleofjersey.com
EquityBull owns shares of Apple, Microsoft, Chipotle and Intuitive Surgical. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.