Apple is a popular stock, but it's not as invincible as it seems. The company is relying on debt to fund its operations and buybacks, which could be risky in the long run.
Apple has issued over $100 billion in debt since 2012, while its cash and marketable securities have declined. This is because Apple is trying to avoid paying taxes on its foreign earnings. By borrowing cheaply in the U.S. and using the proceeds to repurchase its own shares, Apple can boost its earnings per share and stock price without bringing its overseas cash back to the U.S. and paying taxes on it.
This strategy may seem clever, but it has some serious drawbacks. First, it reduces Apple's book value, which is the difference between its assets and liabilities. Book value represents the net worth of a company, or what shareholders would receive if the company liquidated its assets and paid off its debts. As Apple issues more debt and buys back more shares, its book value shrinks.
Second, Apple's debt-fueled buyback strategy exposes the company to interest rate risk and credit risk. As interest rates rise, Apple's cost of borrowing will increase, reducing its net income and cash flow. Moreover, if Apple's credit rating is downgraded, it will face higher borrowing costs and lower demand for its bonds. While Apple currently enjoys a solid investment-grade rating of AA+, there is no guarantee that it will maintain it in the future. A deterioration in Apple's business performance or a change in the tax environment could trigger a negative rating action.
Third, Apple's debt-fueled buyback strategy limits the company's financial flexibility and growth opportunities. By using debt to fund buybacks, Apple is essentially trading future growth for current returns. Instead of investing in research and development, acquisitions, or new markets, Apple is spending its cash on reducing its share count. This may boost its short-term earnings, but it also reduces its long-term potential. Moreover, by increasing its debt burden, Apple reduces its ability to respond to changing market conditions or take advantage of new opportunities.
In short, Apple's debt-fueled buyback strategy is a sign of weakness, not strength. It reflects Apple's lack of confidence in its own growth prospects and its willingness to sacrifice long-term value for short-term gains. It also exposes Apple to significant financial risks that could impair its profitability and solvency. Investors who are enamored with Apple's stock price should look beyond the surface and examine the underlying fundamentals. They may find that Apple is not as sound as they think.
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