Core Problems at Apple

What happens when a company has too much money?

That’s been the situation at Apple for many years. Here is what their balance sheet looks like. It’s from September 2015, their last year end. It looks amazingly robust because the company is so wealthy, but in fact, it indicates a major problem, as I will explain.

(If you are unfamiliar with financial statements, you may wish to look here for a quick explanation of a balance sheet.)

In equity

Looking at Apple’s 2015 balance sheet, we can see that Shareholder’s Equity amounts to $119,355 million. That’s almost $120 billion that “belongs” to the shareholders. Some of it, $27 billion, came from Apple selling shares to the shareholders. The rest, $92 billion, came from Apple’s profits over the years. That’s a lot of profit, in anyone’s books.

Apple, like many growing companies, has held onto its profits in order to reinvest in new products and earn even more money. It is the prospect of a company doing exactly this that makes people want to own its stock.

Apple has a history of doing this very well. It has built many products, from the Macintosh computer to the iPod, iPhone, and iPad, that are adored by its customers. Because of this adoration, it has been able to sell lots and lots of these products, and to sell them for higher prices than its competitors. This has made Apple one of the most profitable companies in history.

Out of stock

So what is the problem, then? It’s quite simple, really. Despite earning billions and billions of dollars in profit over the years, Apple hasn’t been reinvesting its money in new products. It has been, metaphorically speaking, keeping it under a mattress. The flow of great new Apple products has dried up.

This may sound like nonsense when you think about the big annual product announcements that Apple makes, eagerly anticipated by Apple aficionados everywhere. But in recent years, we haven’t actually seen any completely new products from Apple. Product announcements in the last six years have been for accessories like the Magic Trackpad, utility software like iCloud, which offers Apple users a way to store photographs and documents in the Internet (just like Dropbox and Google and Microsoft do), and alleged product flops like the Apple Watch, for which Apple refuses to release sales figures. The last great product Apple came out with was the iPad, in 2010. The iPad, however, only accounts for 10% of Apple’s sales. Two-thirds of Apple’s sales come from the iPhone, and it was launched back in 2007.

The iPhone used to be by far the most advanced phone available, but Apple has not maintained its technological advantage. Competitors now have the same or better features, perhaps not as well integrated as in the iPhone, but competitive nonetheless. And while the latest iPhone is indeed more advanced than the previous version, it is only incrementally better. There have been no new amazing features for several years, only slightly better screens and slightly better cameras. The iPhone is no longer markedly better than the best phones from Samsung and other competitors.

If you are looking for the point when Apple admitted that its technological dominance in the phone market was over, think back to 2013. That’s when Apple introduced the iPhone 5C, available in a range of colours. When a technology company starts touting the fact that its products come in different colours, you know they have run out of ideas.

I’m not saying Apple is going to go bankrupt. Apple has plenty of money. The problem is a shortage of invention. Apple fans will argue differently, but the conclusion seems undeniable to me. Apple has so much cash sitting around that if it did have a good idea for a new product, it would most certainly fund it. Apple’s huge pile of cash is itself a sign that the well of ideas has, at least for now, run dry.

How bad is it, doc?

Apple’s balance sheet shows that it has more than $21 billion in cash. But this is just the tip of the iceberg. Look at the balance sheet again. There are two lines labeled “marketable securities,” one short-term and the other long-term. Marketable securities are just stocks and bonds. The “short-term” part just indicates the portion of its stocks and bonds that it expects to convert back to cash in the coming year. As with any investment portfolio, some investments roll over every year and have to be reinvested. In total, short-term and long-term, Apple has $185 billion invested in the stock and bond markets.

These are not strategic investments in other companies. These are just routine financial investments made like anyone else who has a lot of money. Apple has been parking its cash while it waits for the next iPad or iPhone to come along. Apple has now been waiting six years. It may yet come up with a great new idea, but investors are getting nervous.

Counting its cash and its marketable securities, Apple is sitting on $206 billion in wealth that it has no good use for. Think about this. If you buy shares in Apple, you are buying a share in Apple’s pile of cash, stocks and bonds. Apple has become a mutual fund company.

This is why some investors have grown fed up with Apple and have either sold their shares – Apple’s stock price is down 20% from its November 2015 peak – or have demanded that Apple share its wealth by paying dividends. In my next post, I’ll explain the difficulty Apple has had in complying with these demands.


Photo of public art taken in Reykjavik in 2015.

Images of Apple's 2015 balance sheet taken from Apple's 2015 annual report.