INTRO: We all know Apple as the world’s largest company,
the world’s most profitable company, and arguably the world’s most revolutionary company. But,
did you know that Apple is also one of the most indebted companies? As of June 2022, Apple had
$10.9 billion in outstanding commercial paper, $14 billion worth of short term debt, and $48.8
billion in other current liabilities. They also had a total of $94.7 billion in long term debt and
$53.6 billion in other non-current liabilities. All of this adds up to a total of $222 billion
worth of debt. Given Apple’s insane profitability along with their massive cash reserves, you would
think that Apple would pay this debt of ASAP, but they’ve actually been doing the exact opposite.
Over the past several years, Apple has been consistently taking on new debt.
If you take a look at their total liabilities over time, you’ll see that they’ve 10Xed their debt
over the past decade. And even just a few weeks ago, they raised another $5.5 billion. At the
same time, Apple has also been vigorously reducing their cash reserves. Since the beginning of 2020,
Apple has reduced their cash reserves from $107 billion to just under $50 billion.
So, while Apple is indeed more profitable than ever before, they’re also more leveraged than
ever before with a debt to equity ratio of over 2. So, why in the world does Apple have so much debt?
ECONOMIC REASONING:
Starting off with the reasoning that applies to not just Apple but all of us, we have the economic
reasoning. By this point, I’m sure all of you guys are well aware of how high inflation is. In July,
we saw inflation reading peak above 9%, and in the most recent inflation reading, we saw
inflation come in at 8.6%. People are hopeful that this decline means that the peak for inflation
is already in, but even if that’s true, we’re likely going to see elevated inflation readings
for atleast another year. So, it’s smart to leverage strategies that benefit from high
inflation and one of those strategies is taking on more debt. Now, at first, this may seem a bit
counterintuitive. When inflation is high, the cost of production skyrockets which makes it difficult
for companies to maintain their margins. So, psychologically, the last thing that you’d
want to do is add on more debt and take on yet another regular payment. But, in the long term,
this is actually the best time to be taking out debt. You see, if you lock in a loan today,
your payments themselves will be the same for the entire duration of the loan. However, this cannot
be said about the value of payments. With high inflation, the real value of each payment will
be consistently declining. For example, paying $1000 mortgage in 1990 is not the same as paying
a $1000 mortgage in 2022. The 2022 mortgage is far cheaper despite being the same dollar value.
Companies are able to take this idea to even the next level because their debt
generally works differently from the debt that we’re used to. For example, with a mortgage,
you’ll be paying principle and interest every single month. Interest makes up a larger portion
in the beginning and a smaller portion near the end, but regardless, you’re paying interest and
principal with every payment. With corporate debt, however, companies generally only make interest
payments for the duration of the debt. And it’s not till the end of the term that companies pay
back the principal. Now, this might not sound like a big deal, but it is and here’s why. Let’s say
Apple took out $1 worth of debt in 1970 at a 3% interest rate for 30 years. Interest rates were
obviously not that low in the 1970s, but that was the last time we saw inflation at these levels,
so that’s why we’re using this time period Anyway, this would mean that Apple has to
pay 3 cents per year in interest which works out to a total of 90 cents over 30 years.
This is quite a substantial amount given that the interest itself is nearly equivalent to
the initial loan value of $1. But, Apple would actually come out ahead by quite a margin. You
see, Apple didn’t have to pay back the initial $1 till 2000, and by that point, one 2000 dollar was
only worth 23 1970 cents. So essentially, Apple borrowed a dollar and only paid back 23 cents.
You would of course also have to factor in the cost of the interest, but Apple comes out on top
by a large amount. Considering this, you might be asking, why in the world would anybody loan Apple
any money when they know that Apple is gonna come out ahead. Well, the answer is that the lender’s
alternative options are even worse. Usually, the people that are lending these companies money are
banks, pension funds, and conservative individuals who are retiring soon. For these people, stability
and liquidity are extremely important, so they can’t just go out and invest in stocks. Really,
they only have two options which are to either earn 3% from Apple, Microsoft, and other large
corporations or earn 0.5% from money market funds and CDs or maybe 2% from treasuries.
And from this perspective, taking the 3% deal is a no brainer. So, really it’s a win win scenario.
Apple gets cheap money while lenders get the best returns they can without going into equities.
TECHNICAL REASONING:
As you can see, borrowing money at low interest rates during high inflation itself is rather
profitable. But, Apple isn’t going around and borrowing money just so they can churn
interest rates. Honestly, that’s probably not even worth the hassle for them. The main reason
they’re borrowing so much money is to actually deploy it areas that produce greater returns.
For Apple specifically, this seems to be in two areas starting with stock buybacks.
If you’re not familiar with stock buybacks, this is essentially when a company goes onto
the stock market and buys their own shares. This not only increases demand for Apple stock,
but it also reduces the supply of Apple stock. You see, when a company buys back their own shares,
these shares become what is known as treasury stock. At this point,
companies do have the right to sell these shares back on the market if they wanted to,
but more times than not, companies decide to retire these shares which basically means to
remove them from the supply permanently. Over the past several years, Apple has been buying back
record amounts of shares. Almost every quarter, they’ve been buying back $15 to $25 billion
worth of Apple stock which has reduced the supply of Apple stock substantially. Within the last 10
years, the number of outstanding Apple shares has fallen from 26 billion shares to 16 billion
shares. And this is one of the main reasons that Apple has been able to continue growing their
market cap parabolically despite already being so large. Aside from funding stock buybacks,
another reason Apple has so much debt is to fund their dividends. For the longest time,
Apple didn’t actually pay any dividends because they couldn’t afford to. But, starting in 2012,
Apple starting paying dividends, and they’ve been aggressively increasing their payouts ever since.
Their dividend payout has literally increased 10X over the past 10 years. Now, you might be
wondering, why borrow money to payout dividends? Well, the first thing to establish is that Apple
doesn’t need to borrow money to pay dividends, they just choose to. And the reason they choose to
is to make their stock more desirable. Here’s the thing, even a company like Apple can only
grow their revenues and profits so much. iPhone sales peaked years ago and the only reason Apple
has been able to continue growing their numbers at an insane rate is thanks to their high margin
services. Service related profit accounts for nearly half of their gross profit even though
services don’t even account for a quarter of their revenue. So, services have really been their cash
cow over the past couple of years, but sooner or later that’s gonna start leveling out as well.
And at that point, the appeal of Apple stock would be lower than ever. Now, this is not a
bad thing given that all companies eventually get to this side of the S curve. But in the meantime,
most companies pump up dividends to slow down this process as much as possible.
FUNDAMENTAL REASONING:
With the economic and technical reasoning out of the way, we have the fundamental reasoning
for taking out debt. Honestly, this isn’t super applicable to Apple today given that
they’re already past the growth phase. I mean, it’s not like Apple needs to borrow money to
build a new factory or develop the next big thing. Now, technically, Apple does spend a significant
amount in both of these areas, but it’s not like it really grows the company all that much.
For example, they recently built a billion dollar campus in Austin which is great and all, but it’s
not like it’s pivotal to their growth. But, just because they can’t use debt to fundamentally grow
themselves doesn’t mean that they can’t use debt to fundamentally grow the company as a whole.
The main way they accomplish this is through a bunch of acquisitions.
Now, this might be a bit surprising because you almost never hear about Apple acquistions
on the news. But this isn’t to say that they don’t do acquisitions. They actually do a bunch
of acquisitions. The reason you don’t hear about them is because Apple stays away from all of the
hot companies that you’re familiar with. Instead, they buy several background companies every year,
usually for a few hundred million each. In 2017, for example, Apple completed 12 acquisitions.
In 2018, they completed 10. In 2019, the completed 6. And in 2020, they completed 9. And that’s just
the ones that are listed on wikipedia. According to Apple Insider, Apple usually completes between
15 and 20 acquisitions per year. Usually, these acquisitions help them advance their current
products or develop new products. For example, in 2020, they acquired an AR company called
Camerai and a VR company called Spaces. These acquisitions support the rumors that Apple will
be coming out with their own AR and VR products which will of course help the company continue
growing fundamentally. They’re not limited to just buying up startups either. They can go out and buy
stock in their partners or even competitors. If we take a look back at Apple’s balance sheet,
we’ll see that they have $131 billion in long term marketable securities. So, it’s very possible that
a portion of this has gone towards buying the stocks and bonds of other fortune 500 companies.
Technically, Apple doesn’t need to report a stake in a public company unless its larger than 5%. So,
Apple could have a $100 billion stake in Microsoft or a $50 billion stake in Tesla
without having to tell anyone. Knowing Apple though, they probably avoid these hot companies.
If they do have stakes in public companies, it’s probably in a background company like Qualcomm.
While we don’t exactly know these investments are, as these investments grow, so does Apple’s
balance sheet. And at that point, it’s just a matter of time until that growth is reflected
in their stock price. So, it’s more than worth it for Apple to use debt to fund investments.
APPLE’S DEBT LOAD:
In the end, while Apple is more leveraged than ever before, it’s not exactly a bad thing because
it’s extremely strategic. It’s not like Apple is taking on credit card debt at 20% interest
rates to buy a new TV or something. Rather, Apple is taking on debt at historically low interest
rates to better navigate high inflation while also pumping up their stock price both technically and
fundamentally. And honestly, this is a brilliant way to protect the long term future of the company
and it’s shareholders. With that being said though, Apple does have to be careful because
there’s fine line between smart debt and stupid debt. And it’s not that hard to end up with too
much debt that ends up weighing down the company. I mean have you ever heard of 2008? So, though
Apple has been playing their cards well so far, they’ll have to keep a close eye on the situation
to make sure it doesn’t get out of hand, but that’s just what I think. Would you be willing to
loan Apple money? Comment that down below. Also, drop a like if this video gave you a different
perspective on debt. And of course, consider checking out our discord community to suggest
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