A Stroll Through the Memory Orchard with Apple

Apple Store logo at the entrance to the Apple Store on Fifth Avenue New York.

This time of year tends to make folks sentimental, and the team here at Clean Yield is no exception. In the past few months, we have spent some time perusing (indulging in, really) the Clean Yield newsletter archives. We giggled at the pervasive puns, got a refresher on finance ratios in the “Night School” articles, and were reminded of just how important social investors such as Clean Yield were in addressing apartheid. What jumped out to us most was how much has changed in terms of our understanding of the environmental and social issues to which companies are exposed. In our walk down memory lane, we found no better example of this than Apple.
Apple has graced the pages of the Clean Yield newsletter no less than four times since the firm’s inception. When we first profiled it in December of 1985, we quipped that “going out on the limb [with Apple] should bear fruit.” We warned investors that it was not a stock for the faint of heart, with its wild swings, but that it would be a good bet in the long run. Its products were good for society, it was committed to innovation, and it was ethical, as in, it had divested from South Africa, had no military contracts, had great benefits, gave charitably, and had diverse managers.
In the 1990s, we commented on the company’s ups and downs with headlines such as “times are changing” with new CEO John Sculley at the helm and the “Apple blossoms again” as it positioned itself for a new wave of growth. We continued to report on its military contracts but expanded commentary to include the company’s in-house recycling programs, its efforts to reduce use of ozone-depleting CFCs, its policies on CEO pay, and labor and affirmative action efforts.
In 2016, we posited that Apple may have “lost its polish.” Sales of iPhones were down, and the company was struggling to develop and release successful new products. We highlighted that it did have an array of sustainability challenges to monitor, including labor and human rights and product recyclability, but that it was excelling on some sustainability issues. It was using renewable energy to power 75% of its facilities, had recycling collection rates of 85%, and had a strong system for supply chain monitoring.
In reviewing our social commentary in these Apple profiles, it was clear just how much our understanding of what makes a responsible business has developed. In the 1980s, we focused on a company’s relation to South Africa and its military contracts. We then broadened our focus to look at employee benefits, diversity, and recycling. It was somewhere between the early 1990s and 2016 that our understanding changed dramatically. We gained a deeper understanding of the complexity of environmental and social issues. Instead of just being interested in military contracts and ties to repressive regimes, we started to think about supply chain, labor and environmental standards, the safety of product components, tax avoidance, energy use, and product recyclability (to address concerns about the disposable nature of products).
This expanded understanding did not happen in isolation. There are a number of factors that contributed – the development of the field of corporate social responsibility and sustainability (several companies now have chief sustainability officers) and increased access to information unlocked by the internet. Apple has also grown in scale, which has made it a bigger target for the media, NGOs, and activists. In addition, an alphabet soup of standardized frameworks has developed to help investors better assess material environmental and social risks that companies face. They include the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the Sustainable Accounting Standards Board (SASB).
As investors, we are always looking to better understand the companies in which we invest and the context in which they operate – their stakeholder network. We believe that considering environmental and social factors helps us do that. We also believe that we need to keep learning and challenging ourselves to think about what’s around the bend – to consider the next wave of challenges facing companies and how they could impact us as investors and other stakeholders. We were surprised and encouraged by how much our understanding has changed since we started covering Apple and are excited to continue this process and figure out what’s next.
How our investment perspective has evolved
When we first featured Apple (AAPL) in December 1985, the company had revenues of $1.9 billion and a stock market value of $1.2 billion. Apple was barely profitable, and we considered the stock’s risk level to be high, more of a trading opportunity. Apple had introduced the Apple II and Macintosh personal computers, but from 1985 to 2005, Apple struggled to be profitable and endured two consecutive years of losses in the 1990s. If Clean Yield could be considered a bellwether, our own first computers in the 1980s were Apple IIe’s and very boxy Macintoshes. We then moved to PCs during the mid-’90s with most other businesses, though some employees circled back to Macs in 2016.
The breakthrough for the company came in 2007, when Apple introduced the iPhone. The company’s earnings per share rose from $.58 in 2007 to $6.38 only five years later. After more than one billion iPhones sold since 2007, Apple today has a total stock market value of almost $875 billion, the highest in the world. For those with the nerve to buy in 1985 and hold through more than 20 years of minimal profitability until the iPhone phenomenon, a $2,000 investment in December 1985 would be worth about $1,200,000 today.
We obviously no longer consider Apple’s risk level relative to other stocks to be high. The company has perhaps the most iconic product brand in the world and tremendous financial strength. Apple has more than $200 billion of net cash on its balance sheet, and the company’s operations generate far more cash than is needed for ordinary operations, which leaves large sums available for dividends and share buybacks (which, all else equal, boost a company’s share price).
It’s not all blue sky for the stock, though, in our opinion. The global smartphone market is saturated, despite Apple fans who still are generally eager to upgrade to each new version of the iPhone (though new features seem less and less innovative). The company is trying to counter that slowing growth by emphasizing its recurring service revenue instead of selling phones, computers, and iPads. Services, such as the App Store and iTunes, have become a significant source of growth.
Yet like the overall stock market, Apple’s stock price is at a valuation level that is quite expensive relative to its history. Given that the stock has risen more than 50% this year, we’d trim holdings (within capital gains tax constraints).