8 ms·

Apple should shrink its finance arm before it goes bananas

33 points by hvo 9y ago

likelynew 9y ago
Apple has big volume of cash. What exactly is the downside in investing it in riskier assets?
- mark212 9y ago
  I think the assumption of the author is that the folks who run Apple will be seduced by profits generated by the financial arm and start emphasizing that more. Which if anyone knows anyone who works at Apple is ridiculous in the extreme. Alternatively, they take on more balance sheet risk and then the whole company is jeopardized by a financial volatility event, e.g., a big jump in interest rates. Tim Cook and others do seem to be playing a game of chicken with congress. How long can the US division continue to borrow to find the dividend while those enormous piles of cash remain offshore?
  - MaysonL 9y ago
    How long? At least as long as the pile of cash overseas grows faster than the debt.
- MoBattah 9y ago
  I agree with your sentiment. The cash, even if overseas is still highly liquid and readily available. The author though is trying to get across that certain financial instruments can have a negative multiplier effect. Imagine a day where the S&P 500 drops by 10%, perhaps during it Apple Capital starts to liquidate a few investments. Let's say the next day is worse and we see another 12% drop. Depending on their hedging, diversification, asset class, investment type and liquidity, it could turn out to be a very bad day for Apple Capital enough to where it affects Apple Inc. Obviously the above example is extraordinary and we're talking about highly sophisticated financial engineers but we are technically living in an extraordinary time. US Equities have not performed this well in a long time - perhaps since 1997.
mankash666 9y ago
What should the corporate tax rate, currently at 35%, drop to, for Apple to repatriate foreign cash? It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. All while the local mom & pops pay the 35% and bear the financial burden of the nation
- MoBattah 9y ago
  > It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. Absolutely not. Just because an entity will try to work around your well-intentioned and globally standard laws does not mean you should give up on those laws. In addition, it's quite an elitist and anti-democratic statement -- Apple is by far the world's most profitable public company, to give them a 'tax break' is to add icing onto their cake. Apple is doing what it thinks is best -- taking on debt with the assurance of foreign assets, no matter if those assets are readily available or not. The current US president has tossed around the idea of taxation amnesty for corporate asset repatriation -- if I was Apple, I'd lobby for that while continuing on their current practice. Lastly, there's no real fear Apple won't be able to borrow at a handsome rate. Interest rates are still incredibly low (historically) and the Fed doesn't raise rates by full percentage points, they do it slowly and incrementally.
  - mankash666 9y ago
    Disagree. Apple is one among thousands of companies avoiding tax, while Mom-and-pop companies pay exorbitant rates. No one's working around laws - they're following it diligently while maintaining their fiduciary duty to investors. US corporate tax rates are among the highest in the world - even Canada - having a reputation for being socialist - has a lower rate. You're forcing companies to pay 0% tax in the US if they can get away paying only 5% in Ireland. And Ireland is benefiting disproportionately from American innovation - because of onerous tax rates
    - pjc50 9y ago
      The US is the only country to apply a global income tax to its non-resident nationals. It should apply a global tax to its businesses as well.
ksec 9y ago
People continue to say Apple makes huge profits. But in reality they have a world wide market share of 20%, with Gross Margin at ~40%, Net Margin ~20%. Both Gross and Net Margin figures have been very consistent over the years, And increasingly many profits are from the financial arms, and other services. One way to look at it, is that despite iPhone has been getting more expensive over the past years, Apple are actually earning less % on each unit. In some ways, this is worrying.
- valuearb 9y ago
  They still take the vast majority of profits from three enormous markets, smartphones, tablets, and PCs. Long way from trouble.
  - ksec 9y ago
    Sorry I should have word it more carefully, Not that I think it is worry for Apple, but and overall general Economy. The only reason why Apple is earning 85-95% of profits of smartphone industry per year is because all other manufacturer are posting loses. When everyone decide not to make a dime like Amazon, ( or they cant ), the ones who do will obviously emerge as winner from a Profits POV. What I find worrying is 1. Apple is obviously working in diseconomy of scale, i,e they aren't paying less per component unit with their massive scale, they are likely paying more then everyone else. 2. It is very clear there is an inflation in component ( Or everything else in Asset ) happening. From NAND, Wireless, Memory, Fabs, Screen, everything is getting more expensive, which we wont quite used to because we expect the same Screen, memory or CPU with similar characteristic or performance will cost less 3 - 4 years down the road, but this has not happen. Both point relates to interest rate, the way those company were sustainable because they are making some profits in a likely stable or monopoly environment, and getting very cheap cash flow. That is what i am worry about. I wish someone could tell me what happens when too much liquidity is injected into the system..... but it seems history hasn't written a page on this yet.
    - valuearb 9y ago
      Pretty much all your assumptions are wrong. There is no evidence 1 & 2 are true, in fact the opposite. Apple sells more single models of phones and tablets than virtually anyone. Almost every phone they sold the last year was a 7 or a 7+. And the reason for their profit dominance isn’t other companies losses, it’s they are competing against commodity makers with compelling unique products and value. Beyond iOS and iTunes is their custom SOCs, which are years ahead of their competitors.
erikpukinskis 9y ago
To what extent can Apple leverage internal research to make these investments? They have sales data and supplier numbers for their products... this could be useful not-public information, no?
- timthelion 9y ago
  Is it really fair to use such non-public information? How far can you go till it becomes insider trading. I'm aware that some investors have been looking at parking lot volume via satellite imaging in order to predict the performance of retail companies. Is that fair? Would it be insider trading if Amazon trades stocks of companies which sell through Amazon? Amazon would then ACTUALLY KNOW their sales numbers. Perhaps this whole insider trading thing is a broken idea to begin with. What if I figured out the sales numbers for a cell phone manufacturer by analyzing MAC addresses using a network of wifi sniffers, sales numbers for car manufactures by analyzing traffic camera data using ML. Used security camera footage from stores that I own to figure out what kind of hand bags people caried and then shorted Prada when I knew fewer people were bringing Prada bags into the store...
  - timthelion 9y ago
    Indeed, when I think about it. Isn't big data in a way "insider trading via induction". Like isn't the goal of big data to gain the type of information that you're not aloud to take advantage of due to insider trading laws?
    - statusgraph 9y ago
      Yes, this has been used as a defense against insider trading accusations, sometimes unsuccessfully: https://en.m.wikipedia.org/wiki/Mosaic_theory_(investments) https://en.m.wikipedia.org/wiki/Mosaic_theory_(investments)
      - timthelion 9y ago
        But isn't it equally true, that a mosaic of publicly known information could constitute non-public information? For example, the example I gave of analyzing satellite imagery of parking lots to predict Walmart sales numbers. Is that really fair?
qaq 9y ago
people like to through notional value of derivatives because those numbers look huge but are generally meaningless "the notional value of JPMorgan’s derivative trading could be as high as $70 trillion" makes for a eye catching statement. Apple most likely is holding derivatives to hedge currency risks and their exposure has very little to do with notional value.
- twic 9y ago
  > In theory losses on derivatives would be offset by gains in the value of Apple’s underlying business. That is, in fact, exactly the point of them. If the derivatives are hedging currency exposure, then a move in exchange rates should lead to a change in their value equal and opposite to the change in value of the overseas assets. The whole idea is that they neutralise the effect of changes in exchange rates.

33 points by hvo 9y ago

likelynew 9y ago

Apple has big volume of cash. What exactly is the downside in investing it in riskier assets?

mark212 9y ago
I think the assumption of the author is that the folks who run Apple will be seduced by profits generated by the financial arm and start emphasizing that more. Which if anyone knows anyone who works at Apple is ridiculous in the extreme. Alternatively, they take on more balance sheet risk and then the whole company is jeopardized by a financial volatility event, e.g., a big jump in interest rates. Tim Cook and others do seem to be playing a game of chicken with congress. How long can the US division continue to borrow to find the dividend while those enormous piles of cash remain offshore?
- MaysonL 9y ago
  How long? At least as long as the pile of cash overseas grows faster than the debt.
MoBattah 9y ago
I agree with your sentiment. The cash, even if overseas is still highly liquid and readily available. The author though is trying to get across that certain financial instruments can have a negative multiplier effect. Imagine a day where the S&P 500 drops by 10%, perhaps during it Apple Capital starts to liquidate a few investments. Let's say the next day is worse and we see another 12% drop. Depending on their hedging, diversification, asset class, investment type and liquidity, it could turn out to be a very bad day for Apple Capital enough to where it affects Apple Inc. Obviously the above example is extraordinary and we're talking about highly sophisticated financial engineers but we are technically living in an extraordinary time. US Equities have not performed this well in a long time - perhaps since 1997.

mankash666 9y ago

What should the corporate tax rate, currently at 35%, drop to, for Apple to repatriate foreign cash? It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. All while the local mom & pops pay the 35% and bear the financial burden of the nation

MoBattah 9y ago
> It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. Absolutely not. Just because an entity will try to work around your well-intentioned and globally standard laws does not mean you should give up on those laws. In addition, it's quite an elitist and anti-democratic statement -- Apple is by far the world's most profitable public company, to give them a 'tax break' is to add icing onto their cake. Apple is doing what it thinks is best -- taking on debt with the assurance of foreign assets, no matter if those assets are readily available or not. The current US president has tossed around the idea of taxation amnesty for corporate asset repatriation -- if I was Apple, I'd lobby for that while continuing on their current practice. Lastly, there's no real fear Apple won't be able to borrow at a handsome rate. Interest rates are still incredibly low (historically) and the Fed doesn't raise rates by full percentage points, they do it slowly and incrementally.
- mankash666 9y ago
  Disagree. Apple is one among thousands of companies avoiding tax, while Mom-and-pop companies pay exorbitant rates. No one's working around laws - they're following it diligently while maintaining their fiduciary duty to investors. US corporate tax rates are among the highest in the world - even Canada - having a reputation for being socialist - has a lower rate. You're forcing companies to pay 0% tax in the US if they can get away paying only 5% in Ireland. And Ireland is benefiting disproportionately from American innovation - because of onerous tax rates
  - pjc50 9y ago
    The US is the only country to apply a global income tax to its non-resident nationals. It should apply a global tax to its businesses as well.

ksec 9y ago

People continue to say Apple makes huge profits. But in reality they have a world wide market share of 20%, with Gross Margin at ~40%, Net Margin ~20%. Both Gross and Net Margin figures have been very consistent over the years, And increasingly many profits are from the financial arms, and other services. One way to look at it, is that despite iPhone has been getting more expensive over the past years, Apple are actually earning less % on each unit. In some ways, this is worrying.

valuearb 9y ago
They still take the vast majority of profits from three enormous markets, smartphones, tablets, and PCs. Long way from trouble.
- ksec 9y ago
  Sorry I should have word it more carefully, Not that I think it is worry for Apple, but and overall general Economy. The only reason why Apple is earning 85-95% of profits of smartphone industry per year is because all other manufacturer are posting loses. When everyone decide not to make a dime like Amazon, ( or they cant ), the ones who do will obviously emerge as winner from a Profits POV. What I find worrying is 1. Apple is obviously working in diseconomy of scale, i,e they aren't paying less per component unit with their massive scale, they are likely paying more then everyone else. 2. It is very clear there is an inflation in component ( Or everything else in Asset ) happening. From NAND, Wireless, Memory, Fabs, Screen, everything is getting more expensive, which we wont quite used to because we expect the same Screen, memory or CPU with similar characteristic or performance will cost less 3 - 4 years down the road, but this has not happen. Both point relates to interest rate, the way those company were sustainable because they are making some profits in a likely stable or monopoly environment, and getting very cheap cash flow. That is what i am worry about. I wish someone could tell me what happens when too much liquidity is injected into the system..... but it seems history hasn't written a page on this yet.
  - valuearb 9y ago
    Pretty much all your assumptions are wrong. There is no evidence 1 & 2 are true, in fact the opposite. Apple sells more single models of phones and tablets than virtually anyone. Almost every phone they sold the last year was a 7 or a 7+. And the reason for their profit dominance isn’t other companies losses, it’s they are competing against commodity makers with compelling unique products and value. Beyond iOS and iTunes is their custom SOCs, which are years ahead of their competitors.

erikpukinskis 9y ago

To what extent can Apple leverage internal research to make these investments? They have sales data and supplier numbers for their products... this could be useful not-public information, no?

timthelion 9y ago
Is it really fair to use such non-public information? How far can you go till it becomes insider trading. I'm aware that some investors have been looking at parking lot volume via satellite imaging in order to predict the performance of retail companies. Is that fair? Would it be insider trading if Amazon trades stocks of companies which sell through Amazon? Amazon would then ACTUALLY KNOW their sales numbers. Perhaps this whole insider trading thing is a broken idea to begin with. What if I figured out the sales numbers for a cell phone manufacturer by analyzing MAC addresses using a network of wifi sniffers, sales numbers for car manufactures by analyzing traffic camera data using ML. Used security camera footage from stores that I own to figure out what kind of hand bags people caried and then shorted Prada when I knew fewer people were bringing Prada bags into the store...
- timthelion 9y ago
  Indeed, when I think about it. Isn't big data in a way "insider trading via induction". Like isn't the goal of big data to gain the type of information that you're not aloud to take advantage of due to insider trading laws?
  - statusgraph 9y ago
    Yes, this has been used as a defense against insider trading accusations, sometimes unsuccessfully: https://en.m.wikipedia.org/wiki/Mosaic_theory_(investments) https://en.m.wikipedia.org/wiki/Mosaic_theory_(investments)
    - timthelion 9y ago
      But isn't it equally true, that a mosaic of publicly known information could constitute non-public information? For example, the example I gave of analyzing satellite imagery of parking lots to predict Walmart sales numbers. Is that really fair?

qaq 9y ago

people like to through notional value of derivatives because those numbers look huge but are generally meaningless "the notional value of JPMorgan’s derivative trading could be as high as $70 trillion" makes for a eye catching statement. Apple most likely is holding derivatives to hedge currency risks and their exposure has very little to do with notional value.

twic 9y ago
> In theory losses on derivatives would be offset by gains in the value of Apple’s underlying business. That is, in fact, exactly the point of them. If the derivatives are hedging currency exposure, then a move in exchange rates should lead to a change in their value equal and opposite to the change in value of the overseas assets. The whole idea is that they neutralise the effect of changes in exchange rates.