Apple: Calculating the Steve Jobs Premium

What is Apple (AAPL) stock going to do now that Steve Jobs has taken another medical leave of absence? Let’s review what we know:

On June 9, 2008 Steve appeared on stage to showcase the iPhone 3G and looked thin. To start the day, AAPL was trading at $184.79, and it ended the day at $181.61. It went on a month long selloff until it was priced at $166.90 the day of Apple’s earnings release. During the conference call on July 21st, Apple management mentioned that Steve’s health was a private matter and that he would not be leaving the company. On this news AAPL dropped 10% to $146.53 as Wall Street didn’t fall for the bluff. Sure enough, on July 23rd, Jobs mentioned that he had a surgical procedure earlier in the year and the stock languished in the $150s until August. An important observation is that the initial drop down to $146 did not hold as the next day the stock reached $168, a higher price than before the earnings announcement. By August 2008, Apple traded in the $170s as the Street believed the health issue had been resolved.

On September 8, 2008 the stock dropped $13 from $164 and on September 9th the stock dropped down to $149 as Steve looked frail while introducing the iPod lineup. By the end of September, AAPL was down to $113 and in October it hit a low of $85.

On December 16, 2008 Apple announced that Steve would not be speaking at MacWorld and the stock dropped from $94 to $85 over a five day period.

On January 5, 2009 Steve announced his leave of absence and that Tim Cook would take over the day to day operations of the company. The stock began the day at $93 and dropped to $78 by January 20th, which would prove to be the low for the stock. By the end of January the stock was back into the $90s, by the end of March it was into the $100s, in April it was into the $120s, in May the $130s, and when Steve returned on June 29th, the shares had risen 66% to $143.

Interpreting history is no easy task because of the influence of forgotten variables; the big variable of 2008 and 2009 was obviously the financial crisis, which leaves investors with the difficult task of figuring out how much of the selloff was caused by the Steve Jobs effect. We calculate a 13.9% Steve Jobs selloff in July 2008 that all came in one day, a 10% selloff in September 2008 that lasted two days, a 10% selloff in December 2008 that lasted five days, and a 19% selloff at the actual leave of absence in January 2009 that lasted eleven days. The average of these four precedents is a 13% selloff over the course of five days. Such a selloff from the current price of $348.48 would bring the stock down to $303.

However, the broad market is more improved than it was in 2008/2009, Apple is stronger than it was in 2008/2009, and Wall Street now knows that AAPL is capable of a rally without Steve Jobs at the helm. The problem with selling because of the health of Steve Jobs is that his premium is not even priced into the stock. If it were, AAPL would be at $750 a share. This stock TRADES on Steve Jobs, but it is not PRICED for Steve Jobs. The reality of valuation is that any selloff due to Steve Jobs' health concerns means the market is taking away something that is not there to begin with. Apple trades at a huge discount to its competitors based on cash and growth metrics.

Our portfolio decisions regarding Apple will be based on the early price action. If we can't exit in the $330s, we will turn into buyers of the dip. The great thing about Apple is that its growth trajectory is protected by its multiyear advantage in innovation. This time around, with an improved market environment, investors might get over the Steve Jobs stock shock a lot quicker than they did in 2008/2009.

Disclosure: I am long AAPL.