So what are they saving up 40B$ for?

  • Posted: 26 September 2010 05:46 AM

    What “big bold moves” are ahead?

    My guess: Content owners and/or creators. If the networks refuse to participate, why not buy one or two of them outright? Unlike music, the production companies do contribute a lot to the product, probably more than the actors do.

    This on the assumption that the El Dorado is to be for online TV what Google is for the web: The primary ad broker.

    To be the primary ad broker you must have the eyeballs. To get the eyeballs you need the premium content at an affordable price. In that situation it makes sense to vertically integrate the content production.

         
  • Posted: 26 September 2010 08:17 AM #1

    I see Apple as conducting the symphony, rather than playing strings or brass.

         
  • Posted: 26 September 2010 01:59 PM #2

    Content ownership and content creation are whole new ballgames. Apple receives roughly 30% as distribution fees on revenue generated from content rental or sales. The risk/return ratio of investing in content ownership is heavily weighted on the risk side.

    Having worked in the entertainment industry on the content creation side, most enterprises derive 80% (or more) of their revenue from 20% (or less) of their product portfolio. Content ownership or content creation on average isn’t going to provide the same return on investment Apple experiences from the sale of hardware and services that the company achieves today.

    I don’t see venturing into these markets as the best use of the company’s cash. I’d rather see more retail stores opened and assets invested in strategic partnerships to guarantee component supplies and manufacturing capacity at the best possible prices.

         
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    Posted: 28 September 2010 11:54 AM #3

    There is one aspect of this that most forget.
    Apple’s bank account isn’t static. It’s earning money. With $40bn in the bank it’s got to be bringing in a LOT of money. Anything Apple would want to spend that money on will have to bring in as much or more than the cash is earning right now.

    {Does anyone know how much Apple earns from this stash?}

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    Posted: 28 September 2010 12:04 PM #4

    geoduck - 28 September 2010 02:54 PM

    There is one aspect of this that most forget.
    Apple’s bank account isn’t static. It’s earning money. With $40bn in the bank it’s got to be bringing in a LOT of money. Anything Apple would want to spend that money on will have to bring in as much or more than the cash is earning right now.

    {Does anyone know how much Apple earns from this stash?}

    If the bulk of it is in cash, how much could they be getting?  1.5% maybe if they’re lucky.

    IMO, this isn’t much of a return and the capital could be used for far better purposes.  Just what those purposes should be is up to Apple.

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    Posted: 28 September 2010 12:11 PM #5

    incorrigible - 28 September 2010 03:04 PM

    If the bulk of it is in cash, how much could they be getting?  1.5% maybe if they’re lucky.

    True except I doubt they would let this much money sit around as cash, I’m sure it’s invented. Secondly even if they only got 1.5% that’s still $600 million/yr. Not exactly chump change.

    Of course even if they only siphoned off 10%, $4bn is enough to set them up as a player in any number of markets and they’d still have lots of investment income.

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  • Posted: 28 September 2010 12:13 PM #6

    When last I checked, the blended average yield on Apple’s cash hoard was 0.76%.  So the returns on the cash they hold are trivial at best.

         
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    Posted: 28 September 2010 12:19 PM #7

    JonathanU - 28 September 2010 03:13 PM

    When last I checked, the blended average yield on Apple’s cash hoard was 0.76%.  So the returns on the cash they hold are trivial at best.

    That’s very surprising.

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  • Posted: 28 September 2010 12:38 PM #8

    I have no idea what they have in mind but I’m giddy to find out. Build a private army? Buy a state (NY is probably pretty cheap right now…)? Who knows. My first guess is to buy up some companies like Adobe or TiVo, but that would of course draw anti-trust scrutiny. My main wonder if it’s going to be a slow and steady sort of use, or if they are planning some crazy balls-out roll of the dice kind of thing.
    The best part is they have loads of dough for some rockin’ R&D; maybe Steve will invent fusion and flying cars? The mind boggles.

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  • Posted: 28 September 2010 01:38 PM #9

    Personally, I am pretty skeptical when it comes to ‘uses’ for the cash hoard.  There really isn’t much need for $45.6bn (soon to be $50bn+). 

    We have debated this a lot on AFB, and even with enhanced store roll-outs, vertical integration of manufacturing capacity and increased spending on R&D, Apple would still be hard pressed to spend their operating cash flow, let alone make a dent into their cash pile.  The only use I can think of leads to making some sort of large acquisition.  And when I say large, I am thinking $30bn or more, as any less, they could fund through debt issuance, given their current and expected FCF/EBITDA.

    Having studied historic M&A/large takeovers of listed corporates, it almost always destroys value for the acquirers’ shareholders.  This salient point makes me pretty keen for AAPL not to go out and buy large businesses.

    Also, if we look at AAPL’s acquisitions in the past, there have hardly been any large acquisitions of note.  Rumours had it they bid $500m for Admob, which GOOG snatched out from under them for $750m.  They ended up with Quattro for $275m instead.  I think this example is a great illustration of AAPL in terms of their acquisitions strategy:  don’t get caught up in bidding wars, buy small and integrate quickly into the company.  I therefore don’t think large acquisitions are in AAPL’s corporate DNA and therefore don’t really see this as another source of use for the $45.6bn on the balance sheet.

    So I think the only real ‘use’ for the cash is essentially it gives SJ and the rest of the board, peace of mind that they can make a large acquisition if they need to (which they probably don’t, but you can never say never I suppose).  I think investors are generally willing to give SJ et al the benefit of the doubt given they are all making money hand over fist with share price appreciation, however, eventually the issue of what to do with the cash will come to ahead.  At that point, I sincerely hope buybacks are on the agenda.

         
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    Posted: 28 September 2010 01:57 PM #10

    I’ve been advocating investment in manufacturing for some time. By itself it’s not a worth-while investment but if properly integrated into their product development process it could really change the economics of their device business, not to mention the product launch ramp rate to which they are enslaved.

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  • Posted: 28 September 2010 02:06 PM #11

    I absolutely agree with you Horace.  However, we are talking about a few billion here and a few billion there.  Nothing of the magnitude of tens of billions.

    I still think the point stands that there are pretty limited uses out there for the $45.6bn in cash…

         
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    Posted: 28 September 2010 02:16 PM #12

    JonathanU - 28 September 2010 04:38 PM

    Personally, I am pretty skeptical when it comes to ‘uses’ for the cash hoard.  There really isn’t much need for $45.6bn (soon to be $50bn+). 

    We have debated this a lot on AFB, and even with enhanced store roll-outs, vertical integration of manufacturing capacity and increased spending on R&D, Apple would still be hard pressed to spend their operating cash flow, let alone make a dent into their cash pile.  The only use I can think of leads to making some sort of large acquisition.  And when I say large, I am thinking $30bn or more, as any less, they could fund through debt issuance, given their current and expected FCF/EBITDA.

    This made me think:  What about buying out the competition?

    RIMM is at $24B market cap.
    HTC is $18B (US) market cap.
    http://www.reuters.com/finance/stocks/overview?symbol=2498.TW

    Not that this is Apple’s MO, but imagine if they did that.

    IT also made me realize how protected Apple is based on their earnings, and thus market cap.

         
  • Posted: 28 September 2010 02:35 PM #13

    Please remember Apple holds leases on some of the most valuable retail spots in the world and has over 300 retail stores in operation. Yes, the stores are profitable based on retail margin, but those long-term leases aren’t cheap. Cash is king and cash reserves for retail leases and new retail stores is important.

    Second, one of Apple’s biggest challenges is product supply. Component availability and manufacturing capacity are issues. The ability to forge strategic partnerships with upfront investments of cash are an advantage Apple has over the competition.

    The cash position may seem large, but consider at $50 billion it represents about six months of my anticipated FY 2011 revenue.

    This is more of an issue today because of the paltry return on the cash. Apple has moved into short-term investments to avoid being locked into investment instruments that provide provide an unsatisfactory return over time.

    The question is: What’s the best use of cash for the benefit of shareholders?

    For now the ability to self-finance all capital expenditures, the cash availability to negotiate the best store lease terms possible and use cash to enter strategic partnerships for component supplies and manufacturing capacity is a smart way to go.

         
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    Posted: 28 September 2010 02:54 PM #14

    DawnTreader - 28 September 2010 05:35 PM

    Please remember Apple holds leases on some of the most valuable retail spots in the world and has over 300 retail stores in operation. Yes, the stores are profitable based on retail margin, but those long-term leases aren’t cheap. Cash is king and cash reserves for retail leases and new retail stores is important.

    Second, one of Apple’s biggest challenges is product supply. Component availability and manufacturing capacity are issues. The ability to forge strategic partnerships with upfront investments of cash are an advantage Apple has over the competition.

    The cash position may seem large, but consider at $50 billion it represents about six months of my anticipated FY 2011 revenue.

    This is more of an issue today because of the paltry return on the cash. Apple has moved into short-term investments to avoid being locked into investment instruments that provide provide an unsatisfactory return over time.

    The question is: What’s the best use of cash for the benefit of shareholders?

    For now the ability to self-finance all capital expenditures, the cash availability to negotiate the best store lease terms possible and use cash to enter strategic partnerships for component supplies and manufacturing capacity is a smart way to go.

    DT, I buy the manufacturing capacity argument; it’s always been a concern.  Not so sure about the store argument; with $50B they could probably buy all the property they lease.

    But from a shareholder point of view, eliminating your two strongest competitors, while taking their talents, isn’t a bad thing.
    And at the least, it’s an entertaining idea.  Imagine a world where there was no Blackberry and the best Android phones were not in existence.

         
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    Posted: 28 September 2010 03:06 PM #15

    JonathanU - 28 September 2010 05:06 PM

    I still think the point stands that there are pretty limited uses out there for the $45.6bn in cash…

    Jonathon, I surmise, is stating that within the context of the tech and media universes.

    Even with those limitations, I entirely disagree.  Regrettably, I cannot disclose my reasons.