Can the Apple cash machine keep chugging?

Apple, which has a world-beating market capitalisation of US$776 billion (S$1.1 trillion), is dependent on the iPhone's financial magic and has seen its reputation as a "growth company" diminish.
Apple, which has a world-beating market capitalisation of US$776 billion (S$1.1 trillion), is dependent on the iPhone's financial magic and has seen its reputation as a "growth company" diminish.PHOTO: NYTIMES

The firm's shares have hit a record, but its sales are less than stellar and it lacks new inventions

NEW YORK • Great things are expected of the most valuable company on the planet.

Apple, which has a world-beating market capitalisation of US$776 billion (S$1.1 trillion), is still meeting those expectations, but barely. And that could cause headaches down the road for investors and the stock market as a whole.

Apple shares, among the most widely held in the world, hit a record on Friday, yet the company's sales have been so-so and no new game-changing gadgets other than a revamped iPhone are in sight.

"Apple has ushered itself squarely into a new normal of pedestrian growth," Edison Investment Research said, summing up the market reaction to Apple's latest quarterly earnings report on Tuesday.

In a nutshell, after a stumble last year, Apple started to grow again late in the year and continued to do so in the first three months of this year, but not by much.

Revenue in the first quarter was 5 per cent higher compared with the same period a year earlier - a respectable but hardly eye-popping performance, and one that will not restore Apple's old reputation as a paradigmatic "growth company".

Yet Apple's stock rose last week, after increasing more than 28 per cent this year. The company generates profits on a barely conceivable scale. So what is the problem? It is simply that Apple's standing in the stock market has largely been built on that ageing little object, the iPhone.

A major iPhone rejuvenation is expected in September, the 10th anniversary of its birth. That is likely to spur greater sales, for a while at least. But how long can the iPhone wield its financial magic, and will the company come up with another invention with awesome monetary powers?

Dr Aswath Damodaran, a New York University finance professor who has analysed Apple's earnings closely since 2010, said Apple may no longer be a great growth company but it is still extraordinary. Come what may, he added, Apple churns out staggering quantities of money with metronomic regularity.

"Apple is the greatest corporate cash machine in history," he said. "We should appreciate that amazing achievement. The problem is, it's not growing much. It's a slow-growth cash-generating machine."

On Tuesday, the company provided fresh details of how great a cash machine it is. In just three months, after expenses and investments and payouts to shareholders, Apple's colossal pile of cash and marketable securities grew another US$10.8 billion, reaching a nearly unfathomable US$256.8 billion.

In the scheme of things, how big is that? Consider that US$256.8 billion is more than the value of every other US company except Microsoft, Alphabet, Facebook, ExxonMobil, Johnson & Johnson, Berkshire Hathaway and JPMorgan Chase, according to Mr Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

Apple stashes nearly US$240 billion of its cash offshore, out of reach of the US tax agency. Much of it will presumably return to the United States if the Donald Trump administration lowers corporate tax rates, as it has proposed.

Mr Toni Sacconaghi, an analyst with Bernstein Research, said a favourable tax deal could add another US$9 or so to Apple's shares, which are trading at about US$149.

The expected redesign of the iPhone should also help the stock in the next several months, he said, because "we've found that Apple's share price rises in the three to six months before the new phone comes out". Apple stock is in that sweet spot now, he added.

However, he remains sceptical about Apple's longer-term growth prospects. "The company is so big that it takes a lot to move the needle for growth."

NYTIMES

A version of this article appeared in the print edition of The Sunday Times on May 07, 2017, with the headline 'Can the Apple cash machine keep chugging?'. Print Edition | Subscribe