Technically, it is being invested. The money isn't kept in a big pile under a giant iMattress in Cupertino. Whatever holdings Apple keeps the money in is earning some interest, dividends, or whatever. "Cash" here only means something like "readily convertible."
But, "hoarding" here means that Apple is neither directing investment directly, nor returning the money as dividends to its stockholders, right? I'm guessing the reason is because Apple is investigating future business opportunities which may require deep pockets. In other words, it's possible Apple is involved in exploring some future, highly speculative investment in a new industry, so that they can be "the next Apple" in some economic venture other than phones, tablets, and desktops.
Just to take one example: developing, producing, and marketing a self-driving car will cost a bundle. And, who really knows what Apple is up to? It's fair to say they may have many pokers in the first right now.
I wonder: one big motive of corporate decisions, is choosing businesses that keep or increase their margins, not decrease it(even if it's a good business, with a good ROI) - because of the stock market.
- Does this dilemma exist for decisions made by Braeburn Capital and other Enterprize VC's ?
- And if not, isn't it possible to create a financial structure that will enable businesses run/own more integrated lower-margin businesses ?
It was first cultivated at an orchard in NZ called Braeburn which is almost certainly named after a Scottish person or place. https://en.wikipedia.org/wiki/Braeburn
Apple does already pay dividends, which is more than a lot of tech companies do. The yield was as much as about 2%, which is respectable if not high. It's down a bit now because of the rise in the stock price. (By comparison, the likes of AT&T and Boeing are more in the 5% range.)
If they could reasonably put that investment to use, that would be a fine thing to do. But Apple doesn't really have the same philosophy as Larry/Sergey and Zuckerberg do towards throwing money at any idea that has the slightest bit of potential. They want to see a legitimate and probable chance of success in their investments in addition to a synergy with Apple would enhance the investment or Apple itself. It just so happens that there aren't really hundreds of billions of dollars worth of such investments out there. So, instead, Apple tries to return that money to its investors. Unfortunately for that plan, if Apple were to give that money back to investors, it would incur a massive repatriation tax, so it instead sits overseas, "waiting" for a tax holiday.
Ben Bernanke referred in 2005 to a "global savings glut". The conditions which led to that haven't changed much over the past 12 years.
Gross domestic private investment, fixed nonresidential investment increased 2.8% between 2004 and 2014 (I exclude investment in fixed residential structures as that plummeted by 4.9% in that time frame). Computers and software was the sub-field where investment increased the most, by 6.1% a year ( https://www.bls.gov/emp/ep_table_405.htm ).
Whereas from 1994 to 2004, gross private domestic investment increased at a rate of 5.5% a year. Computers and software investment increased at an average rate of 26.5% a year between 1994 and 2004 (ref: same link).
You have to measure investment against GDP and profit rates as well.
In short, Apple is doing what a lot of people with liquid capital are doing, holding onto it.
Genuine question: given this, am I correct in thinking that if there was a big corporate tax cut the most likely outcome is that the money retained would just further inflate this savings glut?
Cutting corporate tax rates long term increases the incentive to invest. So the savings turns into capital investment, new jobs and higher productivity and wages.
Cutting one time brings back lots of capital to invest, lots of that will be paid to shareholders, who will spend some and reinvest some. With similar effects, for that year.
That's the standard ideological line, but this whole story is about how Apple is stockpiling cash, not investing.
(And yes, I understand that the cash isn't just stuffed in a mattress, but it's an important distinction that the money isn't being invested in the direct sense)
Reinvest in what exactly and in a way that would return money back?
Apple has suffered through the tough times in the 90s where they almost went out of business. Having that much money means Apple can take greater risks and still suffer through multiple failures.
The biggest problem is most of that cash came from iPhone revenue and if you remove that, Apple doesn't have much breathing room to take the same amount of risks.
Apple is currently placing a bid for Tosibia's memory business that could cost up to $30 billion dollars.
I'm sure it is someones $246B job to figure that out, because right now they are not doing much anything beyond managing the iPhone.
If you have that much money, it means you didn't "take greater risks and suffer through multiple failures" in the years preceding.
Buying Toshibas memory business.. that again seems like some bean counters incremental improvement on their iPhone margins. They are going to incrementally improve themselves to death if they can't figure out something new.
That's been Apple since the beginning. They always incrementally improve their stuff. They've never the first to invent and they're always late.
> If you have that much money, it means you didn't "take greater risks and suffer through multiple failures" in the years preceding.
So Apple Watch? Is that a success or failure?
The $3 billion+ purchase of Beats? That everyone said was going to be a waste of money?
AirPods?
Mac Pro redesign was a failure.
The car business that could easily burn through several tens of billions?
There's nothing truly innovative about Apple that no one can replicate but Apple is lucky lately with more people buying more of their stuff like 20m Apple Music subs, popular AirPods, Apple Watch, etc.
Apple Watch was a huge success, $6B in sales first year alone, best selling watch in world by revenues.
Beats? Can't tell from outside, but I'm still skeptical.
AirPods? Reviews have actually been great, much better than first impressions. Sales? Who knows.
Mac Pros actually probably made good money for Apple, but strategically was an awful decision. They milked the form factor for sales, likely sell around $500M a year of it without any upgrades/investment for now 4 years. But given it was a poor solution for most Pro users, it's sales are just a symptom of a ton of pent up demand that Apple isn't meeting. Plus the loss of users abandoning the platform because the top end was capped so low.
The car business is a puzzle and unlikely to ever turn out well.
Apple is truly innovative in the best ways possible, which is why it's so successful. Xerox invented GUI computing, Apple figured out how to make it work much better and fit it into a $2,000 box the masses could use. MP3 players were around for years, Apple made them far more usable. Tablet computers were in development ever since Go in the 90s, no one every cracked it for mass markets until the iPhone and iPad. Apple's attention to detail with the proximity sensor and multitouch and a dozen other innovations is what made a touchscreen phone finally usable (and why Google ripped all the keyboards off their Android prototypes the day after they saw the iPhone).
Sure Apple once had unique design skills and attention to detail. The iPhone is a great example of that.
But mobile app design, and Apple's success gave many people/companies great expertise in design, And some do put the effort and attention to detail that is required.
So in today's world, is that enough ?
And if not, that might explain why Apple's watch wasn't meaningfully better than Android's - although it did made more money, probably, mostly because of brand and market position.
The details are worth a lot to the right customers. For example, I might spend up to a thousand dollars more for my Mac than a similar PC. But that works out to a cost of way less than 50 cents an hour to me in work hours. The extra details only need increase my productivity less than 1% to pay for that. Details such as being able to run three operating systems, retina screens, high build quality, mag-safe, Mac OS features, etc, etc. For me, it's a no brainer.
I bought an Apple watch for development, but it's been a pretty good purchase all around. Two years of value and it works better than ever. I can't say the extra functionality makes it worth more than an android watch costing a few hundred less, but I suspect they do given it's something you wear every day.
As a shareholder, they should raise the dividend. If you can't find opportunity to invest the money, it should be returned to the shareholders. I'm all for keeping cash around for a rainy day or for future opportunities but not 33% of your market cap. That is an absurd misallocation of capital.
> A cash horde isn't very helpful if your business is tanking. It prolongs the pain but doesn't fix anything. Ask Yahoo.
I was (in hindsight, correctly) skeptical of MM and her gang's effort to pull more eyeballs into Y! with things like Tumblr and in smaller extent bringing in people like Katie Couric and David Pogue. Personally, I don't know what Yahoo! is and that makes me hard to tell whether they're doing the right thing at all. As much as we love to hate MM, I don't know if any of us could do any better.
Apple, I sort of get what they are. They are a hardware company that (at least presently) sells phones for $800 that has a bill of materials of about $250. They can use the rest of the margin to make the phone as appealing to consumers as possible. Everything else is a side show. (sorry mac fans) Now where does Apple go from here?
I think about the narrative in the iPhone ten year anniversary podcast (listened to it because it was on the front page of HN so thanks to whoever submitted it) that Apple had to cannibalize its iPod business and started thinking about at least two years before the iPhone was released.
Unpopular opinion but I think it is unlikely that Apple will get the next big thing right. I don't think self-driving cars will not be a high margin business. Yes, I want electric cars and self-driving cars to become mainstream because I want one for myself. There's no way I will buy a $60k+ car in the next five years. But I digress.
Like what I read from what GP said, I think Apple will likely fail not once but multiple times. It is easy to forget the bad old days:
> Since then there has been a lot of noise and shouting, but little has changed. The smaller dealership continues to sell sleek Euro-styled sedans and to spend a lot of money on advertising campaigns. They have had GOING OUT OF BUSINESS! signs taped up in their windows for so long that they have gotten all yellow and curly. The big one keeps making bigger and bigger station wagons and ORVs.
Nor does investing pointlessly or burning the money.
Nothing is a sure fix for tanking businesses.
Yahoo didn't do anything to help themselves, there's nothing innovative or useful about them. Google, Facebook, Twitter, Instagram is what is draining the life away from Yahoo.
Truth is, this kind of money is already being "reinvested" by the treasury function. What isn't clear is what on Earth Apple could do that would cost that much money and generate Apple-like returns.
The obvious solution to this is to cut out the middle-man and just return a good chunk of the cash to shareholders. But that never happens because reasons.
This cash reserve is a large reason Apple started paying dividends several years back. A large portion of this is also overseas and they want to bring it back to the US without the present tax obligations.
Only if you know how. Burning cash in a bonfire won't do Apple good. Shareholders and the market in general would not approve of money-losing follies.
But I think if they really get serious about building cars, they can make good use of some of that money in order to quickly scale up. Where Tesla has to raise billion after billion to ensure they are not running dry, Apple could just use up reserves.
One question I have about Apple is: why should they want to build cars? Or anything else, really, except phones and computers and possibly other personal electronics? Why shouldn't they stick with what they're good at, invest their cash in that business when they can, and when they can't then either return it to shareholders or hire a portfolio manager or ten to invest it elsewhere?
People often criticize Twitter for trying to be Facebook instead of just being Twitter. Why shouldn't Apple just be Apple?
They already are, you have to understand, they're practically printing money with the iPhones. They are capturing more than 90% of the market's profits for high end smartphones.
They are not sitting around doing nothing. They cannot just print new innovation every year, it doesn't work like that.
The problem will be when the market is fully saturated and people start upgrading every 5-10 years instead of the current 2 years.
I don't think saturation is a problem. You can't get silk from a souse ear, or something like that. Apple's growth rate will continue to slow, but as long as it maintains it's competitive position it will still be very profitable and a good investment.
The Buffett investment (actually his sub-managers did the investment I'd bet) is an example of Apple gradually becoming a more attractive investment to value investors as it gradually becomes a worse investment to growth investors.
Furthermore, I have no doubt that Apple has people doing work in all sorts of adjacent markets like AR, VR, more wearables etc. But the consensus seems to be that it's going to take a lot of things coming together for true mainstream products in AR for example. And for better or worse releasing effectively a version 0.6-type product to test the waters just isn't Apple's style (at least deliberately).It's not just a matter of no company has invested enough money yet.
Because Apple's secret sauce is great UX by vertical integration of hardware/software. Although a car is a much bigger challenge, it is one of the few markets that can move the needle for them. Apple has always placed strategic bets on the future, and now that they are currently the most valuable company in the world by a significant margin there's no better time.
The Twitter case is quite different; it's not as if Apple is going to turn the iPhone or Mac into a car. The problem with Twitter was that the original product vision was never coalesced and realized properly. Twitter in some ways is a beautiful thing that Apple, Microsoft or Facebook could never produce, but for whatever reason that was not good enough for stakeholders and they reached beyond their grasp.
Because they need another golden geese. The iPhone alone accounts for 70%+ of their earnings, and the smartphone market is pretty much saturated and almost completely matured. What do you think investors will start to do once iPhone sales start slumping, and Apple has no 'next big thing' lined up for a growing market?
I still can't buy an iPhone 3 quality phone (+ camera!) for $200. Until I can, the smartphone market isn't saturated and Apple will keep printing money on new iterations of their devices, which tend to phy sically break down in <4 years.
I guarantee if iPhone sales plateau every shareholder who dumps their share will be replaced by a new shareholder. Value investors love nothing more than predictable cash generating businesses with low capital requirements.
No tree can grow to heaven and the growth potential for the most profitable business on earth is equally limited. There are investors for zero profit growth "stories" and investors for proven businesses with tremendous moats.
Warren Buffet seems to agree: Berkshire Hathaway built a $18B position in Apple recently. And I'm pretty sure that he would love nothing more than for Apple's stock price to go down in the short run, so that buybacks increase his percentage of the company even more.
You can't acquire Elon Musk. First, he's not going to be happy losing his independence. Second, to buy Tesla you can't just pay todays absurdly high price, you have to pay so much higher to convince virtually all of the non-Musk shareholders to vote for your offer.
And if you "win" that auction, Elon will probably just devote even more of his time and energy to SpaceX.
Jobs asked Apple to buy NeXT. When they did, he explicitly refused to return as an employee. He only changed his mind laster because they were such a mess and he had an emotional commitment to Apples success, because he founded them. And at the time, he only had one other major interest, Pixar, and it was mostly run by the Pixar folks, Jobs wasn't writing or directing movies or developing animation technology for them.
Purchasing Tesla is almost certainly a hostile takeover at an insane price tag. Elon Musk has no need of money or to sell the business, his highest priority is to be able to run it without being told what to do by anyone else. Elon Musk has no emotional connection to Apple, but has a huge one to SpaceX, which he is super actively involved in all strategic planning.
Tesla would be a terrible acquisition and there isn't enough money in the world to convince Elon to let Tim Cook be his boss, and to spend his time designing phones and computers instead of rockets and electric cars.
If Apple won the takeover bid, Elon would cash out his shares and pour the money into SpaceX and new businesses, and tell Apple to kiss his ass.
The 'financialization' of our society has turned a lot of companies that you still associate with producing goods or services into de facto investment and speculation firms.
The article implies that Apple would take too big of a tax hit by doing so, to the point where it's better to wait until the laws change to make it more profitable for Apple to do so.
I've read somewhere that this is somewhat unprecedented in the history of economics. Traditionally hoarding cash was frowned upon by investors and the stock prices of companies with large cash reserves traded at a discount. That negative discount by the stock market appears to have vanished but nobody is sure why. Maybe it's regarded as an insurance against technological disruptions. In such a case companies like Apple could quickly acquire new competitors.
Apple is trading at a discounted P/E compared to Nasdaq as a whole, and has done so for years. They have caught up a bit in the last couple of months, though. I'm not sure it's because of their large cash reserves, but it might be a factor.
Most of this money is stored on things like multi billion factories manufacturing exclusively for Apple. For my company we went to some of them, and you get the impression of being on a huge manufacturing Catedral. Apple has a scale nobody in the world has, and I am used to see lots of factories, from cars' to refrigerators's manufacturing places.
If this money figures as cash it must be only for fiscal or "not telling your competitors how you do things" reasons, but this scale exerts an enormous pressure over suppliers.
There was an article that claimed Apple bought so many aluminum milling machines at one point that it was almost impossible for competitors to get their own to make aluminum cases in any volumes. That's years ago and possibly apocryphal, but Apple does have some some big economies of scale in certain key points of manufacturing their products. They tried to do same in Sapphire but that one didn't work out.
There isn't a 'point' exactly. Typically companies hold cash or cash equivalents to write checks against when they are either expanding or buying material that will later be sold. So if you're a company building widgets you need parts for the widgets to build them before you have sold them to get the money. Some companies will use a line of credit for that, others will use cash.
An interesting comparison here is IBM. Like Apple, IBM's operations generated a huge amount of cash in the early days. Way more than they needed to run the business. As a result IBM bought real estate. They bought up large parcels near cities and transportation hubs and office buildings etc. In the Bay Area you can see their Almaden Research center, an example of some property they bought in the 60's. When IBM lost their way in the 90's and it was looking like they were toast, they survived by selling off a lot of that property and living off the proceeds. Apple could conceivably operate for 15 to 20[1] years off just their cash on hand.
That said, given today's market rates for cash (under 2% and sometimes even negative), almost anything that wasn't completely stupid would likely give them a better return. And that is something of a conundrum for economists who are wondering why all these companies are sitting on so much cash. It really depresses an economy when there isn't enough cash running around in it to operate it.
Then 'what should they invest in'? Is a solid question. I felt they should build a web crawler/search engine, dump the last dependencies on Google for their destiny. But clearly they are looking at self driving cars (see the story about getting a permit to test in California) they are developing CPUs (they could create an actual semiconductor subsidiary if they wanted). And then there is the challenge of 'where' the money is.
First and foremost a number of people would argue that the 'cash hoard' consists in no small amount of unpaid taxes, which is to say taxes that have been avoided through a variety of legal schemes from being paid to the governments of the territories where they do business. And that argument is bolstered by the fact that Apple doesn't move cash around in order to avoid taxes on it (the whole repatriation thing). On the one hand if the governments give up their claim on any taxes owed, then Apple is free to collect the money into the jurisdiction where it can be invested most profitably, on the other hand there are civil servants who would really like to get their hands one some of that cash[2].
Bottom line is that there isn't a point, but various conditions have made holding cash the default choice.
[1] Their cost to operate would go up as they were non-profitable but their headcount could go down if they weren't in product production.
[2] And in many cases the governments believe it to be 'owed' even if there is no legal statute that states that.
But, "hoarding" here means that Apple is neither directing investment directly, nor returning the money as dividends to its stockholders, right? I'm guessing the reason is because Apple is investigating future business opportunities which may require deep pockets. In other words, it's possible Apple is involved in exploring some future, highly speculative investment in a new industry, so that they can be "the next Apple" in some economic venture other than phones, tablets, and desktops.
Just to take one example: developing, producing, and marketing a self-driving car will cost a bundle. And, who really knows what Apple is up to? It's fair to say they may have many pokers in the first right now.