Apple's $160 Billion Mystery

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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There's a mystery to the data Apple Inc. released for the first quarter of fiscal 2014. Its cash position has increased by $12 billion to $158.8 billion; it usually goes up in the first quarter, but why does it never go down? Based on the previous quarter's results, Carl Icahn -- whose company owns $4.7 billion worth of Apple shares, according to data compiled by Bloomberg News -- called the iPhone maker "perhaps the most overcapitalized company in corporate history."

Icahn's demands for a massive share buyback have fallen on deaf ears: Apple Chief Executive Officer Tim Cook countered them by saying the company already had a huge repurchase program in place. On the earnings call yesterday, Cook said this: "Last year we increased the program overall -- our cash return -- doubling it to $100 billion, and $60 billion of that is buyback and we've been progressing on that."

The progress, however, has been slow. In the first quarter, Apple only repurchased $5 billion of its stock. It opted for increasing its cash pile rather than humoring Icahn and others who were clamoring for a bigger payout. That in itself may well be logical. Bloomberg analyst Anand Srinivasan pointed out recently that "large tech peers, including many semiconductor makers, typically do not generate positive returns on buybacks, especially when adjusting for the cost of equity. This may be a consideration in Apple's decision, as it may be able to generate a better ROI internally."

Indeed, Apple might argue that it has better investment ideas than buying its own stock. Its executives are constantly dropping tantalizing hints as to what these might be. "We continue to invest very heavily in R&D," Apple Controller Luca Maestri said on the earnings call. "We are making investments in areas that are visible to all of you today, but also in areas that are not visible, which we're very excited about."

Apple's quarterly research and development expenses have indeed grown faster than its cash position. They have increased 75 percent since the first quarter of 2012 to reach $1.33 billion, while the cash pile has grown only 62 percent. But the development spending is tiny compared with that hoard, which is piling up despite all the invisible projects Maestri mentioned.

Perhaps Apple is putting aside the cash to go on a huge buying spree. Well, it sort of did in 2013, announcing 15 acquisitions, half of them to improve its mapping service and only three suggesting possible breakthrough projects in consumer electronics: the second-screen television startup; Passif Semiconductor, which could help Apple produce a low-energy wearable device; and the Israeli motion-sensor developer PrimeSense. It has been suggested that the latter's technology might be used to switch channels on a TV set by waving a hand.

While the mergers and acquisitions activity has been unusual for Apple -- it only bought two companies in 2011 and four in 2012 -- it wasn't particularly costly by, say, Google Inc.'s recent standards. The $345 million purchase of PrimeSense was Apple's biggest deal for the year.

So why, then, does Apple need a cash pillow sufficient to cover production costs and operating expenses for a full year? The easy answer would be to say that there is simply more money coming in than Apple knows how to use, and investing it in the financial markets -- $144.7 billion of the cash pile is in the form of securities -- provides a higher return than a buyback.

Another answer would be that Apple management is deeply unsure of the company's prospects. Apple's success depends heavily on the iPhone. In the first quarter, the iPhone accounted for 56.4 percent of the company's revenue. Recent data from the market research company Kantar show that the smartphone's share of unit sales declined in all major markets in Apple's fiscal first quarter compared with a year earlier. Despite the impressive sales growth numbers for emerging markets that Cook rattled off on the earnings call -- 76 percent year on year in Latin America, 115 percent in central and eastern Europe, 65 percent in the Middle East and Africa -- Apple is growing slower than the competition in these markets. And unit sales actually declined in North America in 2013, Cook said on the call, attributing the hiccup to a change in carriers' upgrade policies.

Although new projects -- a wearable device, an innovative TV, a possible smartphone-based payment solution -- are in the development phase, no one can be sure how they will do in the marketplace. One would need Steve Jobs's confidence to say firmly they will change the world rather than fall flat. Then again, it was Jobs who started the cash hoarding. Perhaps it would be unfair to ask his successors to stop it until they have matched his success as a revolutionary product guru.

(Leonid Bershidsky is a Bloomberg View contributor. Follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Leonid Bershidsky at

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