Is Apple Borrowing Money a Sign of the Changing Market?

Historically, the vagaries of the technology market have bested any company too slow to change with the wind. Though its sheer size suggests that it could stay the course for a number of years regardless of headwinds, Apple (NASDAQ:AAPL) announced last week that it would shift course, hike its dividend, and placate shareholders hungry for yield.

Previously, Apple was able to maintain investor demand in its stock by launching new products, increasing sales, and reaping massive profits. But the company’s rapid-growth phase is winding down and the company is ripening. Apple is expected to slowly transition away from a product-cycle-driven, hardware-focused computer company to more of a software and services company. This means flatter quarterly revenues and steadier earnings — this means appealing to shareholders not through share price growth but through dividends — as announced in the last earnings report.

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What’s more, margins are falling to more sustainable levels. Apple lost 9.9 percentage points off its gross margin last quarter, and is expecting it to fall between 50 and 100 basis points further. Year over year revenue growth in the next quarter is expected to be just 1 percent. Where this revenue is coming from is also changing. Apple generated about 66 percent of its revenue overseas last quarter, a recent high. And even though the U.S. is by far the company’s most-important market, other segments are growing faster.

The inevitable result of this is that most of Apple’s $145 billion cash-and-investment war chest is held overseas.

Analysts estimate that Apple has about $45 billion in the U.S. — not quite enough cash to comfortably finance U.S. operations and the $100 billion capital return program announced last week. So, in order to fund the measure, the company will do something that it has never had to do before: access the debt markets.

To be clear, Apple does not necessarily have to do this, it just makes the most sense. Repatriation taxes would cost the company far more money than the interest on corporate bonds. Apple laid the groundwork for its bond program in a filing with the U.S. Securities and Exchange Commission on Monday.

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Last week, Moody’s assigned a senior unsecured rating of Aa1 to Apple with a stable outlook. Moody’s commented that “the Aa1 rating reflects Apple’s position as one the world’s leading providers of mobile communications devices, tablets, personal computers, portable media players and digital content. Although the company does not possess dominant market share in most of its segments, its brand positioning at the higher end of its product categories, led by the flagship iPhone, and its interrelated suite of products allows it to command premium pricing and generate outsized returns relative to industry peers.”

However, Moody’s analyst Gerald Granovsky commented that “Apple’s Aa1 rating is not higher (Aaa), due to Moody’s view that there are inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors.”

“The rating also assumes that Apple’s product refreshes continue along the same pace as in previous years. However, the history of technology and consumer electronics industries has consistently demonstrated that disruptive technologies will arrive and incumbents are not necessarily the ones who will benefit,” adds the firm’s statement.

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