A princely sum

Apple’s cash and marketable securities increased to $76,156,000,000. The increase was 15% sequentially or $10.4 billion in three months. That’s the equivalent of an increase of $11 per share (to a current $81.2/share.)

The composition and growth of liquid assets is shown in the following chart:

There is little I can think to say about this that hasn’t already been said (see last Critical Path show.)

Except maybe that the amount is now nearly 16% higher than three months ago. And that the amount added last quarter is higher than the amount on hand 4.5 years ago. And that the cash added is higher than Google’s overall revenues in the quarter.


In Q1 2009 the company’s share price briefly traded at $78. A buyer of shares at that price will have recovered their investment in retained earnings in nine quarters.

  • What about the noticable shift to long-term investments in the last 11 quarters?
    As these investments ought to be bound to historically low interest, it looks not very wise. Or is it something about tax evasion/trade/currency exchanges?

    • asymco

      I don't know. Maybe they ran out of bonds to buy.

      • It looks like Apple wants roughly $25B in cash and short-term. Everything else goes into long-term. Is it possible that this $25B would be their acquisition fund? Would long-term securities be just as easy to use for acquisitions?

      • Joe_Winfield_IL

        I agree, there must be something about the $25-30B range in the cash/short term holdings that feels right to Apple. I would come to the opposite conclusion though; it would seem that this money is more likely used for R&D, supply chain security, etc. I would think the long term securities are a more likely candidate as an acquisition fund, with approximately $25B set aside for regular operations or a rainy day fund. But I know nothing about these things and I'm just guessing.

      • KenC

        Their ST and LT securities are probably mostly US Treasuries, with some corporate bonds mixed in. The US Treasuries are extremely liquid, aka like cash, regardless of term.

        They may have chosen to move more and more of their cash into LT Treasuries just so they wouldn't have to roll over their ST securities so often, as they mature.

        Also, keep in mind that a majority of their cash is held in foreign subsidiaries. It may be transactionally easier to put that cash into Longer-term securities, and not having to roll it over constantly.

        I doubt there's any relationship between cash and ST securities and an acquisition fund. As I noted, the LT securities are virtually identical in liquidity, that's why they lump it in with cash. And, there's no reason why one would only use cash to make an acquisition when borrowing is so cheap.

    • EWPellegrino

      You're assuming that the longer maturity notes are fixed coupon – that needn't be the case, they could be floating, inflation linked etc. Just because Apple is increasing the average tenor of their portfolio, doesn't necessarily mean they are increasing it's duration.

  • Will Apple be a trillion dollar company. Will it be the first?

    • asymco

      Hard to say. Inflation adjusted, Standard Oil may have been more than that. Also state owned companies have been valued much higher (e.g. Saudi Aramco had an estimated value in 2010 of between $2.2 trillion and $7 trillion).

      • Which begs the question, how big would Apple need to get before they were threatened with an anti-trust action… regardless of the fact that their platforms and software see healthy market competition. Sometimes law makers get antsy at the sight of that much capital (and power) tied up in one place.

      • asymco

        Anti-trust legislation is nominally a function of market share. I believe Apple's market share in all products except the lame duck iPod is single digits.

        European anti-trust legislation is triggered around 40% share (I believe).

      • Chris

        Nope the Mac is 10% and iOS is about 30%

      • Kizedek

        Macs might be around 10% of US market, not Europe (which Horace is speaking about) or world. The US figure is helped by whole school districts buying Macs (which were tough decisions to push through because of the monopolistic practices MS leveraged / still leverages over IT departments, purchasers and decision makers).

        If iOS (including iPads and iPods?) is around 30% of anything it is "smartphone" market, and that hasn't reached even 50% of overall handset market (see Horace's countdown). So, at very best your figure should be 30% of 50% of handsets. (When the iPhone launched, I think Apple said they would be happy with reaching their target in a year of 1% of worldwide mobile handsets — and everyone laughed.)

        And then, there being a lack of worthy competition in the areas Apple does well in by opening up new markets for itself doesn't mean Apple is stifling competition, as MS did by strong-arming its OEM partners. The choice of the end purchaser was limited and controlled by MS before the consumer even looked at a PC. Computer makers had to bow to MS if they wanted to make and sell a viable computer. Likewise, Samsung can always say to Apple "no, we won't make your components for you, go away." The consumer is choosing to buy a Mac or iOS device from among freely available alternatives over which Apple exerts no control (other than by out-classing as it pursues its own components procurement).

      • EWPellegrino

        Nokia were never on the receiving end of any substantial EU anti-trust actions were they? I'd say that indicates that the EU competition directorate believes market share in the handset market can go pretty high before a firm has market power.

      • asymco

        Not action, but there was scrutiny, especially over the acquisition of Symbian.

      • FalKirk

        "how big would Apple need to get before they were threatened with an anti-trust action…"-The CW

        I have many, many bad and nasty things to say about this remark, but let me just limit myself to one. Frivolously prosecuting one of the few successful companies around during one of the greatest recessions of our time is hardly a winning strategy, no matter which party you belong to.

    • addicted44

      I think it could. However, I think folks are underestimating the risks of iCloud. Not considering the security risks involved, Apple does not have a good track record in the mobile space (fortunately, that means they have a lot of experience). What really worries me is the lack of a Beta testing period (unless they are considering MobileMe as their beta tests).

      I would really have preferred if they had opened an invite only iCloud program so they could thrash out all the kinks from the sustem before mass release.

      • iCloud is in a beta testing period right now…?

      • Developers are using iCloud beta.

      • Cody

        But they have… developers for iOS 5 and for Lion have had access to an iCloud beta since announced.

      • addicted44

        They are, but developers form a very small number of users.

        Essentially, what will happen is that Apple will turn on a switch, and suddenly a few thousand users will become a few million.

        Even Google, which is without question the most experienced web company, doesn't take risks like that. All their major services have been gradually increased in size, by starting off as invite only (e.g. GMail, Google+). Even then Google+ faced some major issues, a week after its release.

        Now, I don't expect too many issues, but it is a risk. I will feel far more comfortable about Apple once iCloud is established (and once it is, competitors should be shivering in their boots, because more than any other product, iCloud binds the entire Apple ecosystem together).

      • EWPellegrino

        iCloud won't suddenly be turned on for everybody everywhere. To begin with some services will be limited geographically, the music ones for instance – which have the largest storage requirements. As it is a large chunk of the iCloud experience has already been released to consumers – non–video purchases can already be re-downloaded in the US, purchases other than music or video elsewhere.

        iCloud has enough constraints from licensing that Apple doesn't need to impose additional artificial constraints when launching.

  • moctavio

    Short or long term refers to the duration, they can sell them both. Of course, if interest rates rise, the longe term bonds may have losses when they sell, but they must be taking this into account when they invest.

    • EWPellegrino

      At the risk of being pedantic the word 'duration' has a technical meaning in finance when talking about bonds, actually it has a bunch of technical meanings. The most common meaning would probably be 'modified duration', or just delta. Duration is absolutely not just a synonym for term or tenor.

      In fact whether a bond will lose value when rates rise is directly measured by duration, it's quite possible to construct a bond with negative duration that will gain value when rates rise. A long term, floating rate bond might have much lower duration than a short term fixed coupon bond.

      • davel

        Thanks for the history lesson. A long time ago I realized I know nothing about bonds. This is just a reminder.

  • Martin

    It gets worse. $10.4B added cash – $7.31B profits is $3.09B added solely due to cash. Googles profit last quarter was $2.5B. Apple's probably a more profitable business as a bank than Google is as a tech company.

    If that wasn't bad enough, Goldman Sachs turned a profit of $1.05B last quarter, which means Apple is roughly 2x-3x better as a bank than the king Wall Street investment bank is.

    And $76B in $1 denominations would fill Apple's new 500,000 square foot datacenter to a depth a 6 feet and weigh 83,000 tons, a little less than the displacement of a US nuclear powered aircraft carrier.

    • Harvey

      "which means Apple is roughly 2x-3x better as a bank than the king Wall Street investment bank is"

      I wouldn't go that far. Goldman Sachs may make much higher % gains on their investments than Apple is getting.

    • Rob

      Martin – only better then GS if GS also had $66B to invest, have to look at rate of return not just how much was made.

    • EWPellegrino

      I believe you're misunderstanding the accounts there. Yes Apple gained an additional 3.09BN in cash, but that's not all investment income, some of it is matching an increase in liabilities from Warranties etc.

      In fact later in the filing we see that

      'Total other income and expense increased $114 million or 197% to $172 million during the third quarter of 2011 compared to the same period of 2010, due primarily to lower premium expense on foreign exchange option contracts and higher interest income on larger cash, cash equivalents and marketable securities balances. '

      There is around another 250mil increase in unrealised profits on securities, so you're looking at an investment income of 420million, not 3 billion.

    • eugeneyk

      So that's why that one guy reported that the data centers were empty. They are filled with cash!

      • Eric D.

        That's funny. Can they park a Nimitz-class ship in that place?

    • addicted44

      The bank concept is interesting.

      I think its very possible that Apple might become an end to end payment processor by the end of 2012. The only issue here is that this just doesn't seem like the kind of business Apple would like to be in. Kinda like iAds, which again, isn't the kind of business Apple's DNA handles very well.

    • Note that starting in June, $11—$22 of products' revenues are set aside for provision of iCloud services over the next 4 years. Those deferred revenues are cash flow, too. I haven't bothered to do the math but they could be an important part in understanding the spread between cash flow and earnings.

  • qualitywte

    They add $11 per share in cash. Stock rises $10/share the next day.
    Conservative investors or what?

    • Sam

      Some of the $11 was already expected and priced in, of course. What's more interesting is if asymco's linking of cash-to-share-price correlation will hold with the apparently exponentially growing hoard.

    • Harvey

      Just wait, it usually goes down in the weeks following earnings.

  • justinfadams

    The stock is floating around 3-4% above yesterday's close. This plays into your earlier discussions on the lack of credit given to the growth the firm is achieving, in terms of its P/E.

    At one point, you did a stock price as a multiple of the cash on their balance sheet, and the correlation was pretty stark. With these latest earnings, does that still hold as well as it did before?

    • asymco

      I'll be doing another take on this after the week ends.

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  • joe

    Those weekly expiring options limited AAPL's gain today. People who bought weekly calls struck around 390 to 400 hoping for a quick profit rushed to sell to "lock in" whatever small gain they had. It's rather pathetic. Long term holders shouldn't worry about this at all.

  • sve

    Provided they don't do anything stupid (like buying AOL for $147B like Time Warner did) , Apple's cash hoard will enable fantastic things. They could buy their own satellite broadcasting system. They could put in the beginnings of a high speed nationwide wireless system. They could get into big screen home television sets (oh wait …)

    • Yes, there are counless ways to waste this cash, some of them just mentioned, or they can properly return it to te shareholders where it belongs.

      • joe

        if you need the cash, sell your stocks, what's the problem? cash on Apple's balance she t has option values.

      • unhinged

        I'm sure Apple will respond to this in the same way as Berkshire Hathaway.

  • That's a lot of cash

    So…. Apple is a $50B bond fund that also makes computers?

  • As a shareholder, I"ll gladly take $40 per share as a dividend (10% on the current share), pay 15% tax and reinvest $36 into Apple shares at 11% return on next years earning. That's a heck of a lot better than have it sit on Apple books earning nothing on my behalf. Note that this distribution will in no way slow Applw's growth and in fact will be fully recovered within the next four quarters of operating cash flows. I don't care about the negative market perceptoon assiciated with the dividend. In fact, I woud welcome a lower share price to purchase.

    • Laughing_Boy48

      I've still heard analysts saying that Apple's cash is an anchor. But anchor in a bad way since it's holding down Apple's share price. Something about investors being unhappy about not getting dividends and it's pissing them off, so they won't buy more stock.

      I'm a long-term shareholder of Apple and I'm not looking for a dividend as long as the stock continues to climb. I bought a few shares during the dip last month. However, if the hedge fund managers are unhappy about not getting a dividend, then they'll punish Apple by holding the share price down and I'll still get screwed. I'm certain Apple should have been able to hold $400 yet ended up sinking into the $380 range despite beating all the numbers and getting multiple upgrades after earnings. Damn.

      • davel

        Yes. The Street is always looking to separate you from your wealth while they profit.

        The other day I heard the guy from PIMCO on cnbc say that cash was a good strategic asset of Apple. He coined a term – I forgot what – to describe it. Basically his stance is cash is king in these times and Apple is the king of kings.

    • El Aura

      That will work only if just a small proportion of people re-invest their dividends, otherwise you just drive up share price and the same Apple profits per share then have to be bought for a much higher share price.

      Still, at some point paying dividends is the right thing to do, otherwise Apple turns into an investment fund (with almost no publication of what kind of investments it takes). There is the additional tax on dividends (varying greatly between countries) but that is the governments way of steering money into investments by companies and not consumption by individuals. You can get around this by simply splitting Apple into a technology company and an investment fund.

    • JonathanU

      Iphoned – you're absolutely right.

      Essentially it comes down to whether you think the return on a treasury note will be greater than the return on share price appreciation in AAPL.

      Clearly Apple's management have made up their mind, as if they expected AAPL to rise in the future, then they would be buying back as many shares as they can get their hands on. Alas, they feel that treasury bills are a better investment…

      I'm not one to tell management teams what to do (as if they'd listen), but quite frankly this is getting absurd. $76bn doing nothing but earning less than 1% per annum. It's almost criminal!

      • chandra2

        As Horace has talked about earlier, there is no guarantee that spending all this good money on buying back shares has a positive effect on shares. It may go up but who knows it is due to this. If it goes down, people would say it would have gone down further had it not been for the buy back. I do not think they should 'p#ss away' the money in this share buy back thing. One time dividend of $40 appeals more to me, even with the tax implications.

      • EWPellegrino

        Assume that the price didn't move. Either the shares that they bought are retired, in which case EPS increases, or they're used to write covered options instead of naked options for employee remuneration. In which case diluted EPS increases.

        So either the share price goes up, or the stock become even more clearly undervalued.

    • Kristian

      Wow. That is stupid. Why would you want to pay taxes now? I mean you maybe want to pay taxes, but we the others don't.

    • addicted44

      Apple just returned 125% YoY growth in profits, and you are whining about that?

      You know, there is a simple way to get out of a business if you don't like the way they are operating.

      Sell their shares.

  • BillyK

    Your dividend is baked into the stock now. If you need money sell a few shares. If AAPL pays a dividend the stock will be reduced exactly that amount so you gain nothing unless a bunch of people rush in and buy the stock to get the dividend and pump up the price.

    • Sorry, you seems to have missed my point.

    • EWPellegrino

      'If AAPL pays a dividend the stock will be reduced exactly that amount'

      That would only be true if investors valued $1 of cash per share the same way as they value $1 of dividend, and it's pretty obvious that they don't. If they did, nobody would ever need to discuss discount to NAV for closed end funds.

      The dividend will decrease the value of the stock, but not necessarily by as much – there can be a net gain of value for the investor.

  • Scott

    This cash hoard certainly provides a great deal of insurance against disaster. It is almost eight times current total yearly operating expense. Bad things can happen, yet the cash hoard gives many options to survive disruptions without being forced choose between several poor options.
    I suspect a lot of this money is tied up internationally and would be taxed at Apple's corporate rate, if brought back to the states. This is likely why Apple and many other companies support a tax holiday on foreign funds.

    • The amounts are way beyond any "insurance levels". Way beyond. Repurchasing (undervalued) stock, I believe, may be accomplished without paying the repatriation tax. But even a double- taxed divident will earn shareholders a higher return when reinvested in the Apple stock at these levels than untaxed cash earning zero. Note also that the repurchase window won't stay open forever. Once the stock price moves to full or over-valued levels, the repurchase won't make sense. They should have been re-purchasing sin e 2009 at these levels.

      • EWPellegrino

        Microsoft's cash position is I believe around 50BN currently, and has tended to float around that range. Apple arguably has a far greater need than MS since it has to risk considerable capital on large physical product releases.

        70BN may turn out to be the sweet spot for AAPLs cash pile, it could be even higher. There's no doubt a limit to how high investors will tolerate it going, but the idea that it was way too high back in 2009 is a stretch.

  • Discussion points here seem to confuse psycological impact on the stock (split or not, perception of payin the div or not etc.) with the mathematically optimal return to the company owners. I am personally not concerned with psycology-induced fluctuations, because I know the stock will eventually follow mathematical business returns.

    But it is clear that business returns to the Apple owners can (and I think should) be greatly increased by distributing to these owners a substantial part of their accumulated surplus ASAP, and initiating a regular policy to do so. (Note also the hogwash that dividents means reduced growth. In the case of Apple is is simply not the case.)

    • JonathanU


    • davel

      I would be happy if the stock split 10:1.

      I am not interested in the dividend. I rather the company focus on its products rather than financial manipulation. A lower price point will psychologically be more agreeable to more people, further enhancing liquidity of the stock.

      • jonshf

        A 10:1 split for "psychological" reasons is financial manipulation.

        Getting rid of the cash by dividend or reinvestment is not. The cash is a drag on Apple's growth because cash grows much slower than their regular business. I think Iphoned has explained this really clearly.

        If Apple paid a dividend, a shareholder could use the amount to buy bonds and he would end up in the same state as before the dividend. I would imagine the other shareholder who used the dividend to buy more apple shares would see more return.

        I also think the difference dwarfs any tax considerations and if Apple bought back shares itself much of those taxes could probably be avoided. In that case the first shareholder could sell some apple stock to get back into bonds.

  • Eric D.

    Credit is tight everywhere. Obtaining funds for strategic investments takes time, even for the big players.

    Apple is essentially its own banker. It can quickly cut deals with suppliers and take advantages of movements in markets. And this hoard means vendors will always be banging on Apple's door, trying to get in. Naturally, they will often their goods at lower prices to entice Apple.

    So Apple doesn't have to pay for credit, and the money it has enables it to get discounts. That's a double savings. Apple is its own best investor.

    • JonathanU

      I agree that the cash offers flexibility – but we're talking single billion figures here, not $76bn. Example: Apple said they prepaid for components to the tune of $3.9bn a few quarters back.

      Sure, Apple should keep $20bn to $30bn on hand for such uses. But $76bn? Seriously?!

      • Eric D.

        It's a lot of money. Unless you're a bank.

        Currently, Apple has a huge first mover advantage in the iPhone and even more so in the iPad. It has created unprecedented demand for its products. Competitors are flailing, unable to create a viable hardware/software/ecosystem combination.

        So the field is wide open, for now. The only thing holding Apple back is production capacity, which is strained because its product line requires the very latest in tech developments. Enter Apple, Venture Capitalist. Suppliers are given huge financial assistance in setting up cutting-edge fabs. These would normally be risky bets. But Apple can pre-order massively, ensuring the success of these ventures. In return, Apple gets exclusivity in the early stages and discounts further down the road. These deals happen a lot faster than outright acquisitions, and they avoid the anti-trust pitfall.

        Currently, the world buys about 500 million PCs a year. Given its versatility and ease of use, it's not inconceivable that the iPad (and its successors) could grow the market to a billion units per annum. But today's big banks are still digesting the toxic assets they cooked up in the last decade. They're not exactly the sky-is-the-limit types anymore.

        So who does Apple turn to in order to fund this vast expansion? Apple VC. Conveniently, they share the same offices, so credit approval is lightning fast compared to going outside. Apple is loaded with cash, and paradoxically, this makes them incredibly nimble. The larger the cash pile, the faster Apple can fuel its breathtaking expansion.

        Time to write a corollary to the law of larger numbers.

      • JonathanU

        I agree with everything you say, but we're not talking $10's of billions here. We're talking the odd chunk of $3bn to $4bn here and there. Apple can pay for it from free cash flow (which if you look was $10bn last quarter).

        I agree that having cash on hand is great. But too much cash is just mis-management, plain and simple.

      • davel

        Y is too much cash mis management?

      • EWPellegrino

        It's too big a topic for a comments page – there are plenty of articles about the subject – but the short answer is that too much cash on the balance sheet is effectively diluting a high-return asset ( AAPL stock ) with the lowest returning asset (cash).

        Right now Apple is growing so strongly that investors are willing to turn a blind eye to this, but eventually either Apple's growth will slow or the pile will become too enormous – and that will change.

      • JonathanU

        Hit. Nail. On. Head.

        Great post.

      • davel

        I skimmed the link.

        It doesn't really answer the question other than what an accountant's view of the world is.

        My take is that Apple is an extremely focused and well run company that devotes its energy to producing products its customers want, running an efficient manufacturing/supply chain and looking ahead to current and future technologies in order to plan its future products.

        Money is thrown off by these activities and is used to support the above.

        Most of the criticism I see regarding Apple is directed by institutions that focus on the balance sheet.

        While Apple produces the margins and growth, top and bottom line, that it does I could care less about their self serving criticism.

      • Eric D.

        I guess we'll see. I do think Apple is going to try and expand into as many markets globally as it can while the competition gets its act together. That could mean anywhere from four to ten times their current output, plus infrastructure to match. Only the deepest pockets can pull off that kind of growth.

        In any case, it's going to be a very interesting next couple of years.

      • JonathanU

        Agreed. Apple should use every singly resource they have at their disposal to achieve an increase in manufacturing and distribution. Everything else should be invested in the highest returning asset they can find. And I argue that would be AAPL stock!

      • jonshf

        Well put.

      • addicted44

        You have no context to place that $75 Bn against.

        For example, the cost of a semiconductor fabrication plant was over $5Bn in 2005. It has most certainly only increased since then.

        Apple might feel that having someone else create their chips is too much of a competitive risk (e.g. Samsung), and decide to create (or fund someone to create) a fabrication facility. With the way Apple is doing, 1 may not be enough. That would be $10-20Bn right there, without incorporating risks. And then you need to have sufficient margins for running costs (which are really high).

        And still, we are only talking about 1 component out of the many that make up an iOS device.

        Additionally, the 70Bn includes long term securities, which are not as pliable.

        Finally, Apple's rise may (will?) not always be as meteoric.

        Again, if you don't think Apple management is doing a good job, you should simply sell the shares. As a tiny investor, with little to no inside knowledge, you are mistaking the tail of an elephant for a snake.

      • JonathanU

        Apple's free cash flow is hovering around $30bn p.a. and growing extraordinarily fast. Expect that number to increase to over $45bn in the next 12 to 18 months. I posit that they can pay for literally anything they could possibly ever dream of out of free cash flow, and still have plenty left over to distribute to shareholders.

        I have seen no evidence to contradict this. Have you?

      • addicted44

        I do have evidence. The fact that Apple has NOT returned the cash. The people who actually know about all the future plans, and all the risk associated with them, and all the costs of those plans, have decided to retain that cash.

        Unless you are suggesting that (1) Apple's executives are idiots or (2) they have a psychopathic aversion to giving money to shareholders (despite the fact that they have made them billions), I think the fact that the execs have not given out a dividend is strong evidence that the cash has better uses with the company.

      • jonshf

        Answer to (1) is obviously a resounding "no".
        Answer to (2) is "stranger things have happened". They're not beyond criticism and 76 billion is an extraordinary number.

      • Addicted44

        Apple's growth is also extraordinary. The fact that apple made 2/3rds of their revenues on products that didn't exist 4 years ago, while dramatically growing in the products that constituted the remaining 1/3rd is also extraordinary.

        People really need to provide a reason beyond "that's a really large number" to be taken seriously.

        EwPellegrino is the only one doing that in this thread, but their response is limited by looking only at the financial aspect, and ignoring the strategic value of the cash hoard.

      • unhinged

        What is the possibility of Apple acting as a bank? What are the laws relating to the proportion of cash assets required by a bank in each of the countries where Apple operates? What happens when iOS devices act as NFC payment implements?

        There are many reasons why Apple could be holding that much cash and the company management is in possession of many more facts and plans than we are.

      • EWPellegrino

        Do you mean acting as a payment conduit like paypal or do you mean actually being a bank? If you mean Apple actually setting up a bank then there is a sudden drastic increase in the levels of regulation that Apple would face if they did it.

        Acting as a payment system is a different matter, you don't have to be a bank to handle payments.

      • PatrickG

        Your comments would make more sense if there was some assurance that you had a deep understanding of where Apple intends to go development-wise. The iOS device development required a certain amount of component control in order to be able to deliver at the indicated price point. Further development may require even more component conotrol or even other investments like the anechoic test labs for the iPhone (at a modest $16mil). Since both the iPhone and the iPad were not predicted in the market by anyone, it would be rather foolish to predict what costs will be required for further "disruptions" in the technology market and what those costs would be for Apple. It also frees Apple to assist in the build-out of supporting manufactories as was mentioned elsewhere. If you look at the pile of cash purely from an investor perspective your myopia precludes understanding these rather critical points.

      • Eric D.

        I agree — I have no deep understanding of supply chains. I'm merely pointing out that the window of opportunity for Apple is narrow. Already, there was a report today of Android tablets shipping in much larger numbers than we've seen before. Apple will continue developing new products and improving the ones that exist. But what they really need to do is ramp up production as quickly as possible. They can't compete if they can't deliver. The question is, isn't it easier to fund that with their un-repatriated capital than by going through third parties?

      • JonathanU

        Yes, they can fund foreign investments in production capacity with their unrepatriated earnings. Latest estimates put this at around $30bn.

  • Iain P.

    I beleive Apple 'wrote a cheque' for flash memory to the tune of several billion dollars a few years ago. That helped launch the iTouch/iPhone/iPad revolutions.

    Then this year it did the same for large displays for the iPad (5 billion plus?).

    Imaging never having to convince your banker to pony up that much money. And the deal can be very, very private as a result. So you get the next big thing launched and no one knew it was coming.

    It's not having the money, it's what you can do with it. Be very disruptive!

    • iPhoned

      Right. Pocket change that is a fraction of a single quarter’s cash flows.

    • JonathanU

      Actually given Apple's EBITDA is well north of $30bn per annum, getting bankers to pony up the odd $10bn to $20bn here and there would be extraordinarily easy. In fact they would be tripping over themselves to do the deal…

      Believe me – I work in finance and have worked on plenty of leveraged finance deals.

      • davel

        Why does Apple have to pay a premium to have someone give them something they already have?

      • JonathanU

        Actually debt is quite useful as you earn a tax shield from the interest payments. Given the tax rate in the US is 35%, the tax shield is pretty damn valuable (as opposed to say the UK with a corporate tax rate of 26%).

        It's one of the main reasons why companies lever their balance sheets. It creates value for equity shareholders.

      • This is a serious question. I'm wondering how this differs from the situation with personal mortgages, where people send the bank a dollar to avoid sending the Gov't 25 cents. It doesn't make sense to me for individuals to keep a mortgage as a tax deduction. What's different about the corporate situation that makes this better?

      • jonshf

        Yes. Once again complicated tax laws are controlling how individuals and businesses behave, resulting in decreased productivity for us all.

      • addicted44

        "I work in finance and have worked on plenty of leveraged finance deals."

        If thats the case, the farther Apple stays away from your ideas, the better. Leveraged Deals are almost always nothing but a way to screw Bondholders (and other holders of credit) to the benefit of shareholders. This works great in the short term for shareholders, which is why its most common only with dying companies (or during period of financial insanity, ala AOL), but for a successful company which is growing its profits at over 100% yoy, its a terrible idea.

      • JonathanU


        A typical LBO deal is where you buy a strong, stable cash flow generative business and lever up the balance sheet. You then incentivise management teams with sweet equity to align their interests more closely with equity holders (ie the PE fund). A business plan is established before hand to juice EBITDA growth and pay down debt. If the plan goes like clock work, the business is sold in 3 to 5 years to a corporate, IPO'd or to another financial sponsor, resulting in a profit for both the management team and the PE firm.

        The PE industry has a very good track record of generating value in the businesses it buys. What you describe above is the typical layperson's misconceptions of the industry and shows you really don't know what you're talking about.

      • addicted44

        The "typical" LBO deal works because of the second mechanism you talk about, aligning management interests with stockholders. (not always directly, but by offloading risk). [NOTE: I am not arguing against PE firms in general, which can create value. I am arguing against the excessive use of leverage by these firms].

        The "leveraging" aspect rarely does much to create value. For the most part it simply transfers value from creditors to shareholders.

        The academic research on this is thin, but here is 1 paper that comes to a similar conclusion. I would appreciate if you could direct me to papers which show the opposite (papers written after the mid 90s, when the first bust buried a bunch of leveraged firms).

      • EWPellegrino

        Suppose Apple leveraged up a bit, and issued 20BN in debt which they used to buy back equity. Now given that their cost of capital is far lower on the bonds, that's argubaly adding value to shareholders, but it isn't taking value from bondholders, because there are no current bondholders.

        Thus we can deduce that while increasing leverage will tend to reduce bondholder value there is no requirement that it should be by the same amount as it increases shareholder value.

      • JonathanU

        So private equity firms create value in their portfolios in 3 different ways:

        1) through leverage – gear up balance sheet and then pay down debt
        2) EBITDA growth – through operational improvements etc
        3) Multiple arbitrage – buying an asset for less than they sell it

        PE value creation will almost always be a combination of the three. There's plenty of literature on value creation by private equity, for instance see:

  • Richard R.

    As a long time Apple user and stock holder there's something about the size of this hoard that is starting to make me feel, well, uncomfortable.
    Over the years I have stuck with Apple from day one, through the lean years, and whooped it up during these last few, especially as my stock price went up.

    But I have to say that there's something about this cash that is starting to make me feel like it's obscene. I understand all the positives, but this sure isn't the old Apple, the one who thought and promoted the idea of acting differently, I don't think Gandi or M.L.King, who they so liberally used in ads, would just sit on a pile like this and not do something "good" with it.

    Apple could give away 10 billion and replace it within months at the rate there going. Give some to the owners (the stockholders) or better yet, how about they open a plant that makes something they use here in the USA and put some people to work at a decent wage instead of using factories that are basically sweat shops in a communist country.

    • James

      You're right, the 30.000 people they already employ in the US need not be taken into consideration.

      • Richard R

        Point taken, but how about employing 35,000 and only making 9.9 billion instead of 10?

        Point I'm trying to make is that I hope S. Jobs legacy doesn't start off with references to how much money Apple has, rather how Apple acted differently with the money they used.

    • >>How about they open a plant that makes something they use here in the USA and put some people to work at a decent wage instead of using factories that are basically sweat shops in a communist country.

      Don't blame Apple, blame self-destructive Government policies for driving away manufacturing from the US. E.g taxing production
      at highest rates in the world at both Feds and he States, regulations, threats of unionization…why would anyone want to manufacture here unless forced to?

      • davel

        Sure. The US govt is the cause of prison wages in china, lack of any environmental sensitivity where they dump toxic products in the air, water, ground.

        china is growing fantastically and their environment is paying for it. they are starting to change.

        that said. the west's insistence on outsourcing their capabilities will come back to bite.

        you see it now with 10% unemployment. you will see it later when companies lack the technical expertise to do anything because they havent done anything for decades. you may once have had the ability to shape metal. but if you dont do it one day you realize you can no longer.

        the military will have a problem one day when they ask china to build their planes and tanks.

      • Richard R

        My belief is that the big corporations are the ones who actually love the govt restrictions you list, they get to destroy the unions/middle class while making even more money for them selves. A bit to Orwellian for me, corps. should be for the benefit of the workers, not the other way around.

  • patrick Mc

    I have another theory as to why Apple can't get its PE any higher in spite of its growth. Apple is held 70% by institutions. Regulations force most of those institutions to sell any stock that becomes more than 5% of their holdings. If this stock has a jump in price, then those institutions who already have 5% in Apple have to sell their holdings back down to 5%. if 50% of the stock is held by institutions in this position then a 20% increase in value would force 10% of the stock onto the market. The daily volume is only 15 million shares. 10% would be 92.5 million shares. obviously the stock is not in this tight of a position. On the other hand it would be really interesting if someone who knew enough about institutional investors could tell us if those institutions which are saddled with this regulation are dropping as a percentage of institutional investors. In other words, are index funds, and tech mutual funds becoming a lower percentage of Apples institutional investors while hedge funds are becoming larger? It did look up black rock a well known hedge fund on wikipedia and it is actually listed as the single largest equity holder in Apple.

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  • Greg

    Given the track record of the banking industry over the past few years, why would anybody expect Apple to put themselves in a position to have to deal with these guys. If you were in control of Apple would you really have any interest in meeting with the likes of Pandit or Blankfein or Mack or any of the others in this industry? I would imagine the contempt Steve Jobs must have for these people would make such a meeting almost impossible. You would have the world's best CEO meeting with people who have clearly demonstrated that they have absolutely no idea how to run a company.
    Would these banks even know how to lend money to an entity that actually has assets. Perhaps Apple would just have to verbally declare assets and income, with no verification.

    • The risks to Apple from the need to deal with bankers at this point are about as high as their HQ being hit by an Asteroid. Both exist in theory, but not in practice.

    • davel

      I think that these are incredibly smart people who are doing the rational thing.

      namely betting other people's money to net large bonuses. because the money is not theirs ( privately vs publicly held companies ) and they are too big to fail – when they lose someone bails them out – they are doing the rational thing.

      when they win they win. when they lose they win.

      they are incredibly rational and doing exactly what the system is telling them to do.

      • JonathanU

        Agreed. Investing OPM (other people's money) is the best way of getting rich.

        It's what the entire hedge fund and private equity community is based on. And it works extraordinarily well.

        Heads I win, tails you lose. It would be foolish not to want to be involved in it…

      • addicted44

        Except if the player is "You" and not "I".

        Apple would be the "You" in this instance, and the Goldmans and Morgans would be the "I".

        For Apple it would be Heads I lose, Tails you win.

        (Unless you are talking about Apple becoming a bank itself, which is possible, but unlikely IMO. Just doesn't seem the kind of thing they would do).

  • Dave

    Anyone have an updated AAPL forward PE Ex Cash?

    • JonathanU

      Back of envelope – I would extrapolate earnings at about 100% for the next year – so AAPL trading at 12x P/E ex-cash gives a 6x P/E ex-cash in 12 months time…

      One of the cheapest stocks around.

  • Sam

    I had another thought about AAPL cash last night. Does anyone have a breakdown as to how fluid it is internationally? It's often treated as if Apple could spend any of its dollars anywhere, but we know that if they brought foreign money back to the US it would be taxed, so they don't. And with over half their money coming from overseas operations, how compartmentalized is their cash and how might that affect their operations? Is there any effect from this visible in their growth plans?

    • JonathanU

      Impossible to tell from their 10-Q. They don't need to report any of this in their filings.

      • Actualy, given that 65% of their income is from overseas, and the fact that theyndin't manufacture much in the US (world's highest corporate tax rates) one can pretty much estimate that around 50% of their cash is facing some kind of incremental US tax if repatriated. With further knowledge ofmtax laws and revenue breakdown by region, it is probabl possible to extimate the tax number.

        What I don't know. And perhaps some who doe can comment, is if stock buyback can be done without "repatriation" tax.

      • EWPellegrino

        I don't think that's a warranted assumption. There are plenty of other factors at play, one good question is has Apple aggressively moved taxable income into low cost countries or has it sought to keep the majority in the US. It won't have complete freedom either way because the various tax authorities involved will get stroppy if the transfer pricing is too aggressively slanted against them.

    • Rick

      We think alike. I would like to see a breakdown of Apple's "Cash and Cash Equivalents" by country location.

      It's easy for people to say Apple should pay a dividend, build a plant here, do a stock buyback. But bringing money banked in foreign locations, I would think, would have significant tax implications.

      I suspect the money Apple uses to secure supplies for components from overseas suppliers is located in overseas accounts, effectively eliminating the US corporate tax penalties. I'm not a tax expert, so this is just conjecture.

      • Rick

        Opps, in the above post I meant "Cash and Cash Equivalents" and Marketable Securities – the whole enchilada, all 76 billion and where it is located.

  • berult

    Apple is building up a whole parallel supply and demand infrastructure out of 'patented innovation' liquidity spread out over short, medium, and long term convertibility.

    On the supply side, push the envelope toward third parties cutting edge fab with jumpstart-enabling preferential access and tariffs. Sustain massive and relatively equity-free cooperative R&D to that end.

    On the demand side, extend with an influx of time-lapsed capital and burgeoning creativity the Apple-branded network of access points, physical and virtual ones, to cross the Rubicon of universal, multidimensional ubiquity. 

    This is a whole new ball game that has to be played out on an innovative and integrated conceptual framework. Time-framed liquidity throws a variety of fast-balls and off-speed curves at the competition, well within defensible non monopolistic practices. 'Opportunity cost' capital keeps you nimble, versatile, agile, and …punctual …on the clock, hence minimizes liquidity-constrained shortsightedness resulting in haunting …lost opportunities.

    Shareholders paint-brush economics in soluble black and red. A visionary's clock ticks a golden thread accessible to all from its tacky silver lining…; cash-and-carry evolution of the supply chain and distribution network. A novelty made possible by a minting prowess reenacted from ancient times, the carving out of a legal tender to progress: the iOS-talking communication device.

  • Travis Lewis

    The Dividend topic can go on for a long time. Point is if you start removing Apple's cash. You may have just found their kryptonite. Apple uses it's cash with great effectiveness, maybe just not from the outside looking in.

  • Darrencardinal

    Someone mentioned earlier in the thread doing LBO deals and "incentivizing" management. Supposedly this gets managements interest on the same side as the shareholders.

    But in reality, management is being given a free ride on the shareholders capital. This creates perverse incentives, and in the real world winds up destroying shareholder value. It also leverages the company to an unhealthy degree. The worst example of this thinking is Enron.

    Thank Apple God Apple has no need or desire to engage in such behaviour.

    It is ok and even ideal to be boring in finance. Apple is doing just fine. All that massive cash hoard does is create positive uncertainty. They can do all kinds of deals with su[ppliers on attractive terms and in secret.

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  • My favourite pet idea of what Apple might be planning to do with that cash is a satellite network. I'm sure of the technical and logistical challenges that would be involved in this would be huge, but it strikes me as the right sort of crazy between being barely achievable by a corporation and ambitious enough for Jobs and his company.

    It would give Apple and iCloud a truly global dimension, and reach in those parts of the world where ground infrastructure might be still decades away or downright too costly to ever be built. It would also give Apple a lot of leverage with current ground carriers (satellites wouldn't be a substitute for ground wireless tech where it exists, but they would certainly be a nice complement to it).

    Maybe Apple is waiting for the right technology to be ready or at the right price, but given that the European project Galileo is around €20b (and that's inflated by traditional government procurement), I wouldn't put it outside the scope of what Apple might try.

    • you mean satellite to mobile? that would require a lot of power-hungry radios…

      • jonshf

        Power-hungry and a lot of latency. Low orbit satellites (ala Teledesic) would mean less power and less latency but still far from practical for an iphone size device. Maybe blimps?

  • I'm surprised that no one really mentioned the fact that current slump in USD's worth combined with the domestic/international mix shift has significantly contributed to Apple's dollar result. Horace mentions ASP of iPhone steadily growing, a large part of that particular phenomenon can be attributed to FX.

    If we take a step further, cash pile in reported in USD is reevaluated at the end of the quarter using as so called GAAP rate, usually a spot USD/whatever currency rate. A lot of Apple's cash holdings are NOT in dollars, but in EUR, JPY, CHF etc., therefore the spectacular cash result that we see can easily be 15%-20% due to FX only.

    • EWPellegrino

      a) Apple tends to adjust a lot of their pricing as exchange rates vary, the gap between UK and US prices used to be huge for example, but Apple got a lot better about keeping them in sync. Also Apple partiallly hedges their FX risk, so it's unclear how much they will have benefited from the falling dollar after those hedges.

      b) Just because the cash is held overseas, doesn't mean that it's held in foreign currencies. In fact it's almost certainly held mostly as dollars, because if it weren't you'd see huge volatility in the numbers that just isn't there.

    • JonathanU

      Are you sure a significant proportion of Apple's cash is held in foreign currencies? I couldn't find any evidence of this in their 10-K. Maybe I wasn't looking hard enough.

      • If it isn't repatriated, why would it be converted to USD? It can be hedged, but not converted – additional spread and transaction cost are not worthwhile. Not to mention that apple needs local currencies to pay suppliers scattered across asia

      • EWPellegrino

        Of course it can be converted, you can hold USD abroad in many instruments, Eurodollar debt for starters.

  • chandra2

    Since Apple does things differently than anyone else on many counts, how about something different on the cash issue. My idea is a combination of share buyback and stock dividend. Buy stocks in the open market and give that to stockholders as stock dividend. I do not know if this is possible, legal or anything but if this can avoid any tax implications, this would be optimum.. Shoot it down if this is silly

    • jonshf

      If they buy back stocks, giving them back to shareholders is moot. By buying them back they've essentially decreased the number of shares in the company. In essence, they will have automatically given the value of those shares to the shareholders without having to redistribute them.

      • chandra2

        Well, there is some debate if the theoretical assumption that buy-back results in increased value to the shareholders is 100% deterministic. My idea above will make it so, without any net reduction in shares or without distributing cash to shareholders. I have heard of stock dividends but I do not know how that is executed. If it is same same as stock split, it is of no use. If it is along the lines I am talking about, then there is some value. If there is better tax implications, even better. My idea is similar to what mutual funds offer, which is reinvesting the distributions in the fund itself but we pay taxes on those distributions.

      • jonshf

        Here's an example. Let's say Apple bought back half of all shares, which is absurd but just hypothetical. That means if you owned 1% of the company, you would now own 2% of the company because there will be half as many shares held.

        If they redistributed the stocks to shareholders you would still own 2% of the company.

        In both cases the company would be in debt instead of having a bunch of cash. The company's earnings, however, would be little less than it was because the cash earned little compared to the company's operational earnings. So, you would own twice as much of a company that earned a little less than before. The market may react in crazy ways to this but the fundamentals should point to a higher value for the shareholder.

  • I'm not an expert on finance, but what about these ideas ? 1. Double the # of stores worldwide over the next year and purchase, instead of lease the real estate. I've been traveling through central and southern Europe and I see plenty of iphones in countries without Apple stores. Demand is there for at least a few locations per country. I also read there are fake Apple stores in China. Why don't they convert them to real ones? 2. Stock buyback with the intention of taking the company private. I have absolutely no idea how this works, but I know Apple values secrecy and privacy and removing AAPL from the public exchange allows Apple to discontinue public releases of finance and tax records. 3. Drop profit margin to 0 and pour the passed profit in dropping the ASP of the iPhone and iPad to increase market share. If the strategy is obvious, the market may (foolishly) reward Apple for going after share instead of profit margin and drive up the share price, which would be in best interest of the shareholder. At this stage, market share > cash on hand.

    • jonshf

      I've often wondered why Apple doesn't open stores at a faster rate. Instead of opening stores one at a time, why don't they open, say, a hundred at a time in China. The demand is obviously there.

      As to the suggestion of profit margin drop for market share increase, Apple can't even produce enough devices at current prices. But if they could they probably would follow a more market share oriented strategy and get as many people "stuck" in their ecosystem as possible. I'm sure they've got this all figured out.

      • JonathanU

        Have you considered how technically difficult and how many man hours is needed to open a store the size that Apple goes for? Opening 1 must be a logistical issue that takes a team months to prepare for. So you're no trying to extrapolate that across 100 stores simultaneously. Sounds like a recipe for disaster! Better to take it slowly and get it right first time. Then rinse and repeat.

        But you're right, their cash could be used to expedite the process no doubt.

  • Jeff

    Cash hoard has both strategic and practical uses.

    Also, of that 76 billion, how much is foreign and how much is domestic earnings? If they only have 25 billion in domestic earnings, then any sort of dividend looks a lot worse. Holding $25 billion domestically does not at all seem obscene for a company of apple's size. If they were to give any sort of dividend or make an acquisition larger than that, they would have to PAY TAXES. As a shareholder, would you want to get a dividend that was only 2/3 the size of apple's cash, and then you would have to pay taxes, dropping it to like 50%? If you don't like it, complain about the fucking government, not apple. I for one do not want to see apple's battle chest go to waste. And face it, taxes are pretty much a waste. We could hope for a repatriation tax holiday.

  • EWPellegrino

    There's an interesting thought experiment regarding the cash hoard, which goes something like this. If cash is an amazing strategic advantage which is powering Apple's growth then why not get more cash by borrowing? Apple hasn't had any long term debt since 2003, they've not had any short term debt since 2004.

    Either Apple is being a bit sub-optimal in holding such a large investment portfolio, or Apple was being a bit sub-optimal before in not borrowing cash to have the great strategic advantage earlier.

    As time goes by the reasons for this may become clearer. This may be purely a tax driven consideration, it may be purely irrational and based on Apple's near death in the 90s, it may be a springboard for a transformational purchase that will shock us all. There are lots of possible reasons, but the idea that its size is and has been chosen for entirely strategic reasons seems a stretch.

    Another interesting fact that needs to be born in mind is that not only is the size of the portfolio unprecedented, the speed that it was acquired is also. It's only 7 years since Apple had 5BN with no debt, to put that into perspective MSFT hit 5BN in Sep 1995, and their maximum of 60BN in Jun 2004 – which was also the point when significant sums began to be returned to investors.

    Anyway these aren't questions that will be answered anytime soon, but they are still questions that are worth asking, and people oughtn't be accused of 'whining' when they do so.

    • addicted44

      EWPellegrino, I have to admit, that your reasoning is sound, and is moving me towards the "why not borrow the cash" camp.

      However, one of the possible advantages cash gives Apple is it allows them to retain their famously secretive dealings. Borrowing money will most certainly involve more parties, and transfer of information, which might be a source of leaks (this is just speculation…not sure if this is or will be true).

      • EWPellegrino

        Secrecy isn't really a problem with debt. Apple could issue bonds without any significant extra filing requirements, with 70BN in the bank Apple has the easiest access to credit of any firm anywhere.

        Apple doesn't borrow because it doesn't need to. In fact it didn't start to pay off its debts until the cash hit 5BN, which is quite noticable from the charts.

        Notice how the cash stays at around 5BN until the debt is paid down? Apple clearly felt that 5BN was the correct cushion to have back then, even if it meant holding debt – so it's not like Apple is completely averse to leverage.

        Personally I think the reason the balance sheet has gotten so high is a combination of taxes and management being too busy growing the business to really focus on it. I can definitely see them keeping 50BN though, even when they do finally start returning cash.

      • Jerry

        There is a time-honored strategy for a company in a position where they have (a) large amounts of cash; (b) the ability to borrow at extremely good rates. Namely, start *lending* it. Almost anyone you lend it to will pay rates higher than you do. We keep hearing that there's a significant unmet demand for credit to US businesses today – the banks overdid it for years and are now leery to lend to anyone who actually needs the money.

        Companies have traditionally started on this path by providing financing for purchases of their own products. That wouldn't work for Apple – Apple stuff isn't expensive enough. (Oh, sure, there are people who would love to buy a Mac if they could borrow the thousand or two dollars, but for *lending* that's real bottom-of-the-market stuff, very hard to make any money on.)

        Of course, I see zero chance that Apple would be interested in pursuing such a strategy. It requires significant investment of time and attention to a business about which Apple knows nothing. And Apple's about intense focus on what they *do* know about.

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  • MOD

    This is a lot of money.

  • MOD

    beacoup dollar

  • MOD

    mucho dinero

  • MOD

    This is bigger than the economies of 87 countries.

    • MOD

      I think this shows the success of Apple's platforms, more than any other proof.

  • MOD

    Much of it is overseas too.

  • MOD

    A princely sum.

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