Is Apple the greatest cash machine in history?
Photo: Leeroy Source: Life of Pix
Apple recently reported its 2016 financial performance. Last year the company sold $215 billion worth of products and earned – after expenses, amortization, and taxes – over $45 billion. By contrast, conglomerate GE sold $120 billion and earned $10 billion. Smaller companies may have larger margins, but nothing has ever come close to Apple’s scale. The company has amassed a cash reserve of $250 billion. Enough, if they wanted to, to purchase the entire US auto industry.
But why would they want to? They’re doing what they do so well. And what they do is build beautiful smartphones. Phones that help us manage our lives, that enable the apps that we need to tell us where to find gas, when to pay our credit cards, and what’s the latest email. Oh, and they let us talk on the phone, too.
But nothing fails like success. Many people look at Apple – where three quarters of their revenues come from products that had just been introduced a decade ago – and see the ultimate disruptor: a force of nature ready to create a wearable computer market or smart, self-driving cars or personal passenger drones or something else revolutionary. And they have $250 billion to do it with.
But as one of the world’s biggest companies in a fast-evolving market, Apple is now far more likely to be disrupted than to be the disruptor. The firm has over 100,000 employees, many of whom are world-class experts in their own right who have their own goals and aspirations. It’s far more likely that Apple’s success in smartphones will inspire competitors that cut into sales and put downward pressure on margins. Slowing growth and declining margins will be balanced by rising dividends and stock buybacks. This is the typical progression of a maturing industry. Going forward, investor returns should continue, but they will be normal, not explosive.
Indeed, they have to be. Over the past 14 years the share price has grown over 40% per year. If such growth continued, Apple would comprise over half of the entire stock market in less than 10 years. As the economist Herb Stein once observed, if something cannot continue, it will stop.
Douglas R. Tengdin, CFA