Why following Apple requires innovative analysts

bank vaultby pthread1981

The Bank of Apple: Using capital to ensure additional capacity and supply
[Via asymco]

When I wrote suggesting that the “best use of cash” was not acquisition but integration of manufacturing under the Apple control umbrella, the rumor that set off that discussion was that Apple was financing new facilities for its suppliers.

Those rumors were quashed, but we now know there is something to them.

During the September and December quarters, we executed long-term supply agreements with three vendors through which we expect to spend a total of approximately $3.9 billion in inventory component prepayments and capital expenditures over a two-year period. We made approximately $650 million in payments under these agreements in the December quarter, and anticipate making $1.05 billion in payments in the March quarter.

Apple Management Discusses F1Q11 Results – Earnings Call Transcript – Seeking Alpha [my emphasis]

So Peter Oppenheimer confirmed that Apple is using its cash as a loan facility for its manufacturing partners. It’s not for the first time either. Apple used the same leverage to ensure the supply of flash memory for the iPod line in 2005.

Philip Elmer-DeWitt reminds us Tim Cook confirmed:

The deal, he said, is similar to the one Apple cut five years ago:

“As you probably remember,” he began, “we signed a deal with several flash [memory chip] suppliers back at the end of 2005 that totaled over $1 billion because we anticipated that flash would become increasingly important across our entire product line and increasingly important to the industry. And so we wanted to secure supply for the company.

Partly as a result was a dominant position in the music player market that is still paying off today.


Apple is doing things here that will probably remain hidden to many old-style analysts.It is acting like a bank, loaning money to vendors but in a way that will not affect the bottom line in easily seen ways.

As asymco states:

In other words, Apple Inc. pre-buys additional capacity by using Bank of Apple capital as a loan facility to bring more capacity online. How to judge this use of capital depends on your perspective:

  • From a fiscal perspective, Apple is acting like a trade lender (with moderate to low returns on capital.)
  • From the operational perspective Apple is acting as a limited manufacturing partner, just short of an equity holder.
  • From a strategic perspective, the Bank of Apple lends only to suppliers that commit to producing for Apple Inc. Thus locking out competitors.

It is the strategic perspective that makes this such an interesting approach. Old style companies would be taking that $60 billion in cash and giving it back to the shareholders. Apple is using that money to not only increase the capacity of its own products – which are still supply constrained – but to also make it much harder for its competitors to create similar devices.

This is where innovation can really pay off. Apple can soak up all the innovative vendors to supply your products, rewarding them  by removing risk from their decisions. They are more likely then to want to be part of any further deals, rather than with untested competitors.

And that is why Apple can not easily be analyzed by standard Wall Street metrics. And why newer outlets, like asymco, will be invaluable in understanding what is going on.