Thanks to its successes in the past decade, Apple Inc
. (NASDAQ:AAPL) has amassed an incredible cash hoard, one so large that it has attracted attention from Wall Street to Washington.
On the political front, Apple has been criticized for paying what some have said is too little taxes for the huge profits it generates. On the business end, Wall Street has constantly been clamoring for the Cupertino, California-based company to do something with its $145 billion-and-growing in cash -- raise its dividend, buy back stock, or acquire a company -- rather than just let it sit idle. Just last month, Minyanville’s own Sean Udall opined that Apple would be wise to acquire BlackBerry
However, what’s often left out in this discussion on Apple’s supposedly idle cash hoard is the fact that Apple actually has been spending a lot of money -- just not in the areas that people have been paying attention to.
Apple has actually spent some $21.1 billion on capital investment -- or the purchase of manufacturing machinery and equipment -- since the introduction of the iPhone, including some $8 billion in 2012. At a January earnings call, UBS Securities analyst Steven Mulunovich even noted that Apple “spent almost as much as Intel
(NASDAQ:INTC) does.” Asymco’s Horace Dediu quipped that
though Apple doesn’t do high-profile acquisitions, it in effect “buys the equivalent of one Yahoo
(NASDAQ:YHOO) every three years.”
For the current fiscal year, Apple has even upped its capital expenditure spending to $10 billion. But where exactly is the money going?
Apple CFO Peter Oppenheimer had explained at the start of the year that Apple will spend close to $1 billion in fiscal 2013 on its retail stores. “And the other $9 billion is spent in a variety of areas. We are buying equipment that we will own, that we will put in partners’ facilities. Our primary motivation there is for supply, but we get other benefits as well. We are also adding to our datacenter capabilities to support all the services … and in facilities and in infrastructure. So, that’s where the capital is going,” he elaborated.
But, nagging questions remained after Oppenheimer’s answer. As Dediu noted, Apple’s sky-high level of capital spending is “unusual for Apple’s competitors in phones, PCs or tablets [like Amazon
(NASDAQ:GOOG) or Microsoft
(NASDAQ:MSFT)]. It’s on a level matched only by semiconductor heavyweights” like Intel and TSMC.
Is Apple simply taking advantage of favorable interest rates and purchasing a lot of assembly equipment and leasing them to the likes of Foxconn
(TPE:2317) or Pegatron
Perhaps, says Richard Windsor, founder of the mobile-focused blog Radio Free Mobile
and a former tech analyst at Nomura, who notes that it’s not surprising that Apple is spending big to control its supply chain.
“Part of the problem that Apple has of course was the old one Nokia
(NYSE:NOK) used to have, which was – it’s all very well to be the biggest buyer, but when you ring someone up and say you need 100 million units, they need to be able to deliver that, which is quite difficult to do. So as Apple has grown massively, they’ve had to invest significantly in their supply chain to ensure when they ask for 100 million units, they get it when promised.”
However, Windsor says that still doesn’t explain why Apple’s capital expenditure would grow this year given the company’s growth trajectory and volumes. “[Apple’s] slowed down massively, so there’s no reason for carrying on to build huge infrastructure to deliver all of this hardware. So they are at a point where probably whatever capacity they have is adequate,” he tells Minyanville.
Windsor believes that Apple is investing its money on improving a key weakness in the provision of its own services to end users. Looking at the most common things people do on their smartphones -- like gaming or social networking -- many of them are done not through Apple services.
Most smartphone users do not use Apple services, and that will be a big issue for the company going forward, which is why Richard Windsor thinks Apple is spending its cash on improving its services offerings.
“What that means is when you think about what is great about iOS, is that Apple is really good at delivering third-party applications and services to end users in a way that’s easy to discover and easy to buy,” he argues. “What happens five years down the line when hardware has become a virtual commodity and you can get all of those applications and services that Apple has been delivering on every single platform? Where is Apple’s magic differentiation that allows them to charge a huge premium for hardware?
“This is why I think Apple is spending vast amounts of money on developing in-house and building server farms to build their own services. They need services to maintain their differentiation five years down the line when hardware becomes a commodity.”
Of course, many other theories abound as to what Apple is doing with its money besides investing in production capacity. Is the company spending on a planned transition from aluminum to liquid metal
? Or is it new fuel cell technology?
Whatever it may be -- and we might not know until Apple decides to tell us, given its tendency to keep everything close to its chest -- Dediu believes that Apple is better off spending its money on capital expenditure instead of acquiring companies.
“Using the capital to ensure access to capacity, differentiation, and hence a high margin is better than writing off the goodwill
[from a failed acquisition] after a few years,” he writes.
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Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
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