Apple is Flush With Cash, But Don’t Expect Big M&A

Don’t expect any big M&A. Everyone is asking who Apple will acquire. The answer is: nobody. At least nobody big ($5B+).

  • Apple announced they’re paying $38B in repatriation taxes, which implies they’re bringing $215B back to the U.S.
  • If there was no tax holiday Apple would have paid about $80B in repatriation taxes, compared to the $38B they actually are paying.
  • Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support.
  • We don’t expect this infusion of U.S. cash to change Apple’s capital allocation strategy and believe share buybacks will be the primary use of funds.
  • We don’t expect any big M&A deals above $5B, but see the company continuing to do tuck-in deals and invest in their supply chain.
  • We believe 80% of Apple’s motivation related to today’s news is for economic reasons, 20% for political reasons, and both are good for the company long-term.

Potential uses of cash, by order of significance.

1. Returning capital back to AAPL investors. AAPL will increase its buyback over the next 3 years by about $70B. We also believe Apple will announce a one time cash dividend of $12B. Lastly, we anticipate a 15% annual dividend increase that will cost Apple about $10B over a 4 year period. We expect these three to be announced when Apple reports their Mar-18 quarter sometime in April. We believe most of this is already priced into AAPL’s stock price.

2. U.S. capital expenditures. As mentioned, Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support. Separately, Apple increased its commitment to its Advanced Manufacturing Fund to $5B from $1B.

3. Invest in component suppliers. As they’ve done in the recent past (Corning, Finisar), Apple will continue to invest in key component suppliers, likely optics, displays, or processors, to lock out competitors and expand their lead.

4. Tuck-in acquisitions. This includes hardware, apps, and services. Hardware: Magic Leap’s AR hardware is a logical acquisition on the heels of Apple’s recent (summer of 2017) purchase of SensoMotoric. Magic Leap’s last private round was valued at $5.5B, suggesting this deal is slightly more than Apple typically would pay. Services: Apple Watch and its ecosystem would be bolstered by Peloton. This reminds us of Beats – hardware that adds to the lineup and, most importantly, a services play that would also expand the Watch/fitness data platform. Apps: We could see similar deals to the Lattice Data acquisition related to apps and AI.

5. Longshot: Auto. For starters, they should buy Tesla. But it will never happen because Musk won’t sell. Clearly, Apple believes in autonomy, through what appears to be a smart-shuttle approach. Since the shuttle initiative is early, it’s a high-probability M&A area for Apple.

6. Employee bonuses. Bloomberg is reporting that Apple will be giving to $2500 bonuses in restricted stock to most employees. We estimate about 100,000 employees will benefit, which implies a $250m liability that will vest likely in 2 years.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.