Quick Thoughts: Apple Kicks the Can Down the Road

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–          Apple’s announced dividend and buyback plan barely slows the growth of its cash hoard

–          Apple has never done a big acquisition and it is probably foolhardy for them to start now – they are easy to get wrong if you don’t have experience doing them

–          Opportunities to invest back in the business abound – CDN data centers, wholesale wireless, video content – but Apple has been cautious, even if Google and Amazon have not.

–          If Tim Cook can’t think of a bold way to invest back in his business, calls to give more cash back to shareholders will rise again and soon.

 

Previous Research: The Future of the Internet: The Four Horsemen of the Consumer Cloud, or is it Five?

 

In his first real departure from the legacy of Steve Jobs, Apple CEO Tim Cook announced a $10B annual dividend along with a buy-back of up to $10B in stock over three years.  It’s hard to imagine Jeff Bezos or Larry Page making a survey of the institutional investment community for suggestions on the use of cash, as it is reputed that Apple did.  Not only are the results of such a survey obvious – “Pay us dividends and/or buy back your shares, please!” – but the likelihood that either Apple rival would care enough about their short term share price to follow the advice is small indeed.  Cook’s concession to return part of Apple’s $97B in cash, equivalents, and marketable securities is a sign that he intends to be at least marginally more investor friendly than his peers, and the market is cheering.

However, the big question remains unanswered.  Returning $13-15B per year back to investors is a good start, but Apple generated over $40B in operating cash flow minus capital expenditures in CY2011.  Cook’s comment that the program allows Apple to “maintain its war chest” is a considerable understatement.  The implication is that Apple has plans for which it needs a LOT of cash, but no detail is likely forthcoming. Given annual capital expenditures have stuck close to 11% of operating cash flow in each of the past 3 years, despite spending to build out the company’s retail presence and its iCloud data centers, it is not clear how Apple will spend its growing mountain of cash, even if it is growing that mountain a little bit more slowly.

Meaningful reduction of the Apple cash pile toward funding future growth would take steps even further from “What Would Steve Do?”, steps that are likely beyond Cook’s comfort zone.  Ordinary companies make big acquisitions with cash but not Apple, generally to its credit.  Its deals have historically been small, confined to adding specific chunks of either technology or people to an organic plan of attack.  Its biggest acquisition of the past 15 years was the $400M purchase of NeXT, which presaged the return of Steve Jobs in 2000.  At this point, Apple’s insular culture works against it even if it were open to larger acquisitions.  It simply has no experience in how to do them or how to deal with the aftermath of subjugating them into the Apple way.  As such, I would not hold my breath waiting for an Akamai, Twitter or Netflix deal out of Cupertino.  Tim Cook may or may not prove to be his own man, but he is NOT stupid.

Ostensibly, Apple could use the cash to invest in its own internal capabilities, and there are several possible angles.  Apple’s biggest future competitors – Google, Amazon, Facebook, Microsoft and the like – have made huge investments in distributed data processing infrastructure.  Despite its iCloud processing centers in North Carolina and northern California, Apple is at a grave disadvantage in delivering cloud-based data to its users.  Assuming that an Akamai deal is out of the question (see the preceding paragraph), it may be that Apple will need to step forward with the capital to gain better control of its network distribution.  Buy some backbone fiber and build distributed data centers to serve streaming media to the top 50 markets from no more than 2 router hops away.

The US wireless market is another consideration.  Indeed, with Verizon and AT&T flexing their muscles as Sprint and T-Mobile struggle with their inadequate spectrum holdings and cash flows, Apple might want to invest to promote greater competition amongst carriers.  Usage caps and service throttling by the big boys is NOT in Apple’s long term interests, so buying spectrum in the soon to be available 750MHz band and funding a wholesale network to add capacity to the market would be a bold play that could extend Apple’s hegemony in mobile devices, and help it crack into the living room.

Apple could also invest in video content – to date a considerable hang up for all of the Internet leaders seeking footholds in over-the-top television services – by either paying up for network programming or funding the production of its own proprietary shows and then promoting the heck out of them.  This last idea may be the least farfetched – the Steve Jobs biography makes it clear that TV, the Apple way, was a near and dear project to the late founder.

Of course, it is not clear that Tim Cook has the stomach for these or other outside the box moves for investing the cash pile back into the business.  On the whole, they all sound much more Amazon or Google than Apple, and none of them would be well received by Wall Street.  But if Apple really is keeping its cash to invest back into the business, there is a lot of opportunity to be addressed and several aggressive competitors far less reticent to spend money going after them.  Kicking the can down the road with a modest dividend and buyback doesn’t change the problem – Apple will still be sitting on a growing pile of more than $100B in cash and investments.  If it really does have ideas about investing it back into the company, let’s hear them and get started.  Otherwise, the buzz around much bigger dividends and share buybacks will only get louder.

For our full research notes, please visit our published research site.

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