Apple’s Cash Will NOT Top $250 Billion


Apple doesn’t have a big cash hoard. Most of Apple’s cash is overseas, and it’s less than you think. By now, everyone realizes that repatriating Apple’s overseas cash means a large tax bill; so Apple has borrowed against the overseas cash to pay dividends and repurchase stock.

At the end of its last quarter, on December 31, 2016, Apple had cash of $245 billion, of which $230 billion was held overseas. On the other side of the ledger, Apple had $77 billion in long-term debt and if paid back today, Apple would have cash of about $170 billion.

Apple’s 1Q17 Earnings

Cash, more cash, and no cash were the important numbers in Apple’s 1Q17 earnings release. First, cash and investments continue to grow and now stand at $246 billion.

Apple’s Cash

Secondly, during the quarter Apple returned more cash to shareholders through stock repurchases totaling $11 billion. In the previous quarter, Apple only bought back $5 billion in stock.

Apple’s Stock Repurchases

And lastly, there was no $1 billion cash paid to the Softbank Vision Fund during the quarter as recently announced.


Apple’s Little Cash Problem

Apple Pay doesn’t work on Twitter, so don’t even ask. Apple does not have enough cash to buy Twitter and still operate its business. We all know Apple has lots of cash, which is mostly overseas, but Apple has little cash here, in the United States.

Apple’s cash stash is part of its EU tax problems. Apple – like other Silicon Valley companies – transfers intellectual property to foreign subsidiaries. In this case, Apple then makes royalty payments to foreign subsidiaries for use of the intellectual property. Apple’s royalty payments transfer cash overseas and also reduces its U.S. tax bill.

Apple tax strategy has stashed about $214 billion overseas or 93% of its total cash. This means Apple had only $18 billion of cash left in the United States as of June 2016. So Apple does not have enough money to do large U.S. acquisitions. It does have money to do “small” acquisitions such as the purchase of Beats Audio for $3 billion in 2014 or overseas investments such as Didi.


Lots of taxes will be paid if Apple brings the cash back here. But with so much cash, activists pressured to Apple return it to shareholders. So starting in 2012 and until of June 2016, Apple has return about $172 billion in the form of stock repurchases and dividends. Apple has gotten the cash from issuing debt, so the overseas cash, stays overseas.

Maybe this why Buffett’s Berkshire Hathaway purchased Apple’s stock for $1  billion or $109 per share early in 2016.  Berkshire bought the Apple not for the “product pipeline”, but for the cash. Apple’s Board recently raised to the annual dividend to $2.20 per share and increase the amount committed to stock repurchases.


Did Didi Cost Apple $1 Billion+ ?

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Is Apple’s Didi investment actually more than $1 Billion?  Today, Apple’s 8-K discloses “strategic investments” of $1.376 billion*.  That amount is $376 million more than Apple’s previously announced Didi investment, also referred to as “strategic” by Tim Cook.

How did Apple spend $1.376 billion in strategic investments? Tim Cook also said, “we have been buying companies, on average, every three to four weeks or so.” Here Tim Cook is referring to purchasing rather than investing in companies, so it can’t be that.

Apple’s $1.376 billion strategic investments, beside Didi, could be related to AR. Tim Cook said todayIt (Pokemon Go) also does show that AR can be really great. We have been and continue to invest a lot in this.”  More should be known once Apple’s 10-K is released.

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*See Statement of Cash Flows for the Nine Months Ended June 25, 2016.

How Innovation Dies at Apple

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Steve Jobs passed away about five years ago and some question whether innovation passed away at Apple too. Due to its secrecy, it is hard gauging the developments inside Apple, unless you’re an employee or have a golden ticket. From the outside, should Apple’s innovation be measured by new products, new ideas, patents, or spending?

Apple and its competitors have increased spending on research and development since 2011. By looking at Chart I below, you can see that the direction is upward for Apple, Alphabet, Facebook, and Amazon. Apple has nearly quadrupled spending on research and development from $2.4 billion in 2011 to $8.5 billion in 2015.

R D Spending
Source: Annual Reports

So all is well? It difficult to determine the success or failure based solely on money spent. There is no direct connection between research and development spending and the bottom line. Ratios could be used such as research costs to total revenue.  But since there is no causality between the money spent and net income, financial ratios may not be the best measure.

Another way to judge Apple is by the number of patents granted. Chart II shows the number of utility patents granted to Apple and its competitors, per year, for 2011 to 2015. By showing the yearly change, rather than the overall total, one can see that Apple is reversing and Alphabet is speeding  ahead.

Patents Granted
Source: Intellectual Property Owners Association’s Annual Top 300 Organizations Granted U.S. Patents

In addition, you can see the emergence of Facebook during the same period. Since its IPO, Facebook has increased research and development spending from $1.4 billion to $4.8 billion. In the same period, Facebook was granted 127, 279, and 374 patents for 2013, 2014, and 2015 respectively.

Amazon is another surprise. Like Apple, Amazon is very private. Rather than not say anything, Amazon obscures its true actions. For example, Amazon does not report its annual research and development expenses. So the amount shown in Chart I above is somewhat misleading. And it could also be misleading to those outside of Amazon.

Amazon reports its research and development as technology and content. Technology includes primarily research and development expenses, but Content does not. Content includes all the costs associated with “category expansion, editorial content, buying, and merchandise selection.” Technology and Content went from $2.9 billion in 2011 to $12.5 billion in 2015.

Since Amazon buries its  research and development expenses, you really know nothing. You do know from patents granted, that something is happening at the on-line retailer. In 2011, Amazon was granted 180 patents and five years later, it was granted 1,136 patents. In terms of patents granted, Amazon has come from nowhere while Apple is slowing down.

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Alphabet, Apple, Salt, and Pepper


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Financial ratio just compare different things; an example would be comparing salt and pepper or Kanye and Kim. Entrepreneurs and venture capitalists can use them (ratios) to manage their business. A SaaS business may need to consider its sales efficiency which compares marketing expenses and incremental revenue. The venture capitalist may need to know internal rates of return.

Don’t look there. Look here.  If you read online about financial ratios, you may find textbook explanations. But like sleight of hand, you to need to look another way not to be fooled. Financial ratios just compare two things. For example, a common measure of company profitability is return on equity (ROE). It can be expressed as net income divided by shareholder’s equity.

Another way to think of return on equity, is as a rate of return. For example, an interest rate can be expressed as a rate of return. Assume you deposit $100 into the bank. One year later, you get back $10. If you compare the $10 to the $100, the ratio is 10%. Said another way: you earned a 10% percent interest rate or your rate of return was 10%.

Return on Equity. ROE can also measure how much you will earn if you put your money into a business rather than the bank. ROE compares net income and total shareholder equity.  How do we get shareholder’s equity? An investor gives money to company in exchange for stock. The cash received by the company represents the shareholders equity.

When you buy stock, it’s as if you deposit money into the company.  Now management takes your cash and tries to make more. Stock is more than just a piece of paper; instead it is fractional ownership interest in the company. In theory as an investor, you own a piece of the net income. The net income can be paid to you as a dividend or kept by the company to make money.

Comparing Apple and Alphabet.  For the year ended December 31, 2015, Apple’s return on equity was approximately 43% and Alphabet’s was 15%. So if you give $100 to Tim Cook, he will earn $40, while Larry Page will only return $15 to you. Does this mean Apple is better investment than Google? This post is not meant for investment purposes, but explain to financial ratios.

An investor have many places to put their cash: gold, apartments, land, or under the mattress. Earning the most is the prize. So would rather put you money in a company with ROE of 20% or in the bank with an interest rate of less than zero. The choice is yours, but thinking in terms of rate of returns can be helpful.

SaaSy. Think about sales efficiency in terms of comparing two different things. Here you are comparing marketing and incremental revenue.  If you put $500,000 into marketing and sales and the incremental revenue is $1 million, then sales efficiency is a multiple of two.

For every time you put $1 dollar into marketing you earn $2 dollars of revenue. Is that good or bad? Well like the ROE example, you need to compare it to something else like the sales efficiency of industry. Then you can decide how well you are spending your marketing dollars.

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