Apple Case Study

Tyler Heathcote, Kristina Lord-Eitelgeorge, Logan Dunbar, Emily Cavallo, Pat Fritzky, & Sarah Hemmen

Professor Okoeguale

Finance 312

8 June 2020

Case: Financial Policy at Apple

Steve Jobs and Steve Wozniak founded Apple Computer on April 1st, 1976. The company was an immediate success, with profitability in the first 30 days after selling the idea of the Apple I to a computer store. Despite the successful launch of Apple I and II, Jobs and Apple went their separate ways until Jobs returned to the company in 1997. At the time of Job’s return, the company’s stock at this time was at a twelve-year low and following the previous CEO’s departure, he entered the role of interim CEO with the goal of focusing on Apple’s product strategy and getting the company back to a state of profitability.

Jobs cut 70% of Apple’s product lines and within a year, the company had $309 million in profits. As a next step to increase efficiency and profitability, Jobs hired Tim Cook as the COO, and Cook was able to bring down Apple’s inventory from one month’s worth to six days’ worth. After various successes and decisions that helped Apple once regain their place in the market, Jobs was named CEO in January of 2000.

Since 2000, Jobs helped introduce changes to the personal computer industry as well and Apple released the iPod, iTunes, the iPhone and the iPad. Apple prices were soaring in 2010 and revenues were up over 65% compared to the previous year. Unfortunately, Jobs succumbed to his cancer in 2011 and Cook stepped in as the CEO of Apple.

Apple’s stock price was declining after 2012 as Apple endured a dry spell of innovation and new devices. Shareholders were restless and frustrated, feeling as though Apple was not using its growing cash or returning it back to shareholders. Cook assured shareholders that their position with cash would allow them to take advantage of future opportunities and instill confidence in the market that Apple is disciplined with its cash. In response to the growing shareholder tension, Apple announced a quarterly dividend of $2.65 per share and a 3-year share repurchase plan of $10 billion in 2012; this was Apple’s first authorized dividend since 1995. Unfortunately, this did not boost shareholder confidence and stock price declined.

Part A:

1. How did Apple amass so much cash in the first place? From the beginning of 2000 until its peak in 2012, Apple’s stock price rose from $27.97 to $702.10, an increase of over 25 times.

Conduct an analysis of Apple’s annual financial data from 2000 to 2012 and determine what

specific attributes of its operational performance account for its cash generation and stock

performance.

Apple’s large sums of cash was due to a variety of factors brought on my Apple’s leadership. From 2009 to 2012, Apple’s Sales Growth Rate increased from 14.44% to 44.58%, proving the want and market interest in Apple products. However, not only did Apple have a large customer base, they had a successful strategy and management of capital; by 2012 they had achieved a 35.3% Operating Profit Margin, a 7.94% increase from 2009, and a 26.67% Net Profit Margin. Apple was highly-effective at generating revenue with a low amount of overhead and efficient turning sales to actual revenue for the company.

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In addition to their management of revenue and operational efficiency, Apple also did not give back dividends to shareholders, allowing the tech conglomerate to stack up cash. However, the large stack of cash did not sit well with investors. Not only did they not receive benefits as shareholders, but they were nervous that the large sums of cash Apple held meant that they were not investing in research & development (R&D) which could eventually cause Apple to lose its cash position and reduce its revenue. If Apple did not invest in R&D, the business would ultimately flatline since there will not be innovation/ new products to keep up with competition.

Apple’s longevity and ability to maintain their sales growth may not be realistic as they may not have the ability to make new products if they do not heavily invest in R&D. However, Apple did make the decision to give dividends back to shareholders, meaning they may be reevaluating their cash management practice and how they use their cash showing that Apple is considering restructuring capital management and how they spend their cash. Their ability to grow and their exponential growth can be seen through their Gross Profit Margin which increased from 27.13% in 2000 to 43.87% in 2012. The increase shows Apple’s ability to maintain its significant growth that has to be driven by innovation and the flexibility to adapt to change, as needed.

Financing Apple’s growth was contributed to their low overhead, the overwhelming market for products, and Cook’s ability to reduce operating expenses and reduce Apple’s asset turnover ratio from 1.173 in 2000 to .887 in 2012. Apple’s Operating Profit Margin had significant growth, from 6.64% in 2000 to 35.3% in 2012, exhibiting their low overhead and not having to spend money on operational costs. In tandem to increased Operating Profit Margins, their Cash Flow margin grew from 10.87% to 32.49%, only bolstering the idea that Apple was profitable, efficient, and had quality earnings.

ROE measures the return investment into the company; from 2009 to 2012, the ROE increased from 26.03% to 35.3% meaning Apple was able to earn 35.3 cents to every dollar of common stock equity in 2012, ultimately contributing to Apple’s growth and to their large mass of cash. ROE closely trends alongside the Gross Profit Margin, Operating Profit Margin, and Net Profit Margin, indicating strong performance and efficiency from all aspects of the business.

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If Apple’s cash depletes, the ROE would be impacted negatively because they would not be able to pay off debts as quickly. Their large sums of cash has allowed them to hold 0 long-term debt since 2003. Without cash available, Apple would increase their debt and potentially lose shareholder confidence in the business. While the use of cash in other areas such as R&D and dividends is appealing to shareholders/ investors and necessary for the future of the business, the cash mass provides Apple with a sustainable bank to dip into to pay debts and keeps their ROE high.

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