Understanding Apple’s cash is as difficult and important as understanding Apple itself.
Apple is one of the most successful and profitable companies in the history of companies. Despite a series of dividends and stock buy-backs, Apple still holds almost $269 billion in cash and investments. That’s not just unusual, it’s unprescedented. It’s a sum so vast it fills financial analysts with furor and sends bloggers on back seat buying bonanzas.,
Understanding Apple’s cash is as difficult and important as understanding Apple itself. That’s what makes this Apple cash FAQ by Horace Dediu such a great read,
As individuals we think that having lots of cash makes us rich. For companies it’s the opposite. Cash is a liability. If you come across a company that is cash rich and has nothing else, its enterprise value will be zero. Companies are valued on their future cash flows, meaning their ability to generate cash, not how much they managed to keep. In other words, cash is a measure of past success and investors are interested only in future value. That future value comes from the intelligent allocation of resources toward a valuable goal. A company rich in cash but poor in vision is likely to be taken private or broken up and shut down. Cash is an IOU to shareholders with a thank-you note for the support through the years.
There are a few sections worth pulling out as well. First is the explanation of Apple’s $100 billion in debt.
Although it generates more money than it can use, and that money should thus be returned to shareholders, some of the money is collected outside the US. US (and US only as far as I know) tax laws have a “repatriation tax” that is levied on money coming into the country. So after paying shareholders with the cash it had in the US, Apple had to borrow money to pay shareholders money they had outside the US.
Of Apple’s nearly $269 billion in cash, only about $17 billion is located in the U.S. The other $252 billion is outside the U.S. If Apple were to bring it back to the U.S., even in cases where taxes had already been paid in the country where the money was earned, Apple would be taxes again in the U.S. While there have been a few “amnesty” periods where the tax rate was temporarily reduced to 10%, it was 30% up until the recent tax legislation reduced it to 15%.
At 30%, Apple believed it would lose too much of shareholders’ money by bringing the cash to the U.S. So, it took out loans against the cash in order to pay dividends and buy back shares. At 15%, Apple not only believes the loss will be acceptable, it will no longer be able to avoid it.
It all comes down to the cash belonging to the shareholders. It’s why Apple can’t just use the money to take itself private and avoid Wall Street, which has shown historic lack of vision when it comes to Apple, its products, and its potential.
In theory [Apple] could reduce the share count to a single share and there would presumably be a single shareholder who would own the company, making it “closely held” but the company’s managers are still required to report and act as if it was public.
Apple also tends to spend less on R&D (research and development) than other companies in the industry because of the types of products it’s thus far chosen to bring to market. Including iPhone.
iPhone–the most successful product of all time–cost almost nothing to develop; certainly nothing that required Apple to dip into its cash.
Apple had to invest in multitouch and antenna technologies, to be sure, but it had existing experience and employees in everything from industrial to human interface design, hardware to software engineering. iPhone was primarily about using its existing competencies to much greater effect. Then, over time, growing them out to include things like silicon and machine learning.
R&D has increased over the years as Apple has approached technologies that require more breadth and diversity, from health sciences to autonomous systems, but it remains something that doesn’t come close to even denting Apple’s cash reserves.
Dediu also touches on Apple using its cash hoard to go on a shopping spree for other companies. Including the “Why Apple should by Disney/Netflix/Twitter/Nintendo/Tesla” that get posted every few months.
Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail.
Microsoft buying Nokia on the hardware side and AOL buying Time Warner on the content side are good examples of major purchases that failed to add value to the purchaser.
So far, Apple hasn’t needed a large-scale purchase to acquire new business models. It’s managed to increase services revenue on its own, and the large-for-Apple but not for the industry Beats purchase has expanded subscription revenue. Apple has customers as well — the hundreds of millions, perhaps over a billion, that have bought or use an iPhone and other Apple products. Most of the companies Apple “should buy” have customers that, in large part, already use or have used Apple products.
And cash flow…
Beats and NeXT — which returned Steve Jobs to the company and gained Apple the core technology that became macOS and iOS — are Apple’s largest acquisitions to date. Some of the smaller ones have been profound as well. PA Semi led to Apple’s dominance in silicon. Authentic led to Touch ID and PrimeSense, among others, to FaceID. Also, of course, Siri.
Apple is set to report Q1 2018 financial results on Thursday, February 1. It’s a holiday quarter, so it should be big. Apple has already given guidance and has also announced billions in investment in everything from a new support center to new jobs in the U.S.
But just like Apple only gets into new products when it believes there’s an opportunity to create a differentiated experience that adds tremendous value in a way Apple is uniquely positioned to realize and control, Apple only spends its huge cash pile on opportunities where it believes it will gain the same kind of experience and value.
Check out Horace’s complete Apple Cash FAQ at Asymco.
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