Some readers asked if Apple has learned the ultimate magic of growth: growth without CapEx investment?
Indeed, if you just glance over its financial statements, you would see that its CapEx has been lower than its total depreciation for years.
Yet it has been growing spectacularly at the same time. To solve this puzzle, this article examines Apple’s CapEx under a microscope in Buffett style.
You will see that Apple, unfortunately, has not learned the ultimate magic yet, but it is getting close.
Nikada/iStock Unreleased via Getty Images The investment thesis
Like many of you, I find it difficult to talk about Apple ( AAPL ) without involving Warren Buffett’s stake – for good reasons. The grandmaster must have a unique and convicted view on AAPL given A) his large and concentrated position even by his own standard (about $125B, or 43% of his portfolio), and B) his philosophy of not investing in technology businesses.
Thinking along this line, some readers asked me if it is possible that Buffett finally found a business that has learned the dark magic of growth without CapEx investment. Indeed, its financial statements show that its CapEx expenditures have been lower than its total depreciation for years. As seen below, in the recent few years, its total depreciation and amortization (“DA”) has been about $11.5 billion per year. In contrast, its CapEx has only been about $9.2 billion per year. Yet it has been growing spectacularly at the same time.
Buffett has commented multiple times on the beauty of capital-light businesses (and the ugliness of capital-intensive businesses). As an example, here’s what Buffett had to say about it in the 2003 shareholder meeting (the emphasis was added by me). People want to send me books with EBITDA and I say fine, as long as you pay CapEx. There are very few businesses that can spend a lot less than depreciation and maintain the health of the business. So is AAPL one of the very few businesses? No, but very close. And let’s find out why. Source: Author and Seeking Alpha. Apple and our retirement
A bit of general background about myself and AAPL. My family is in the final stage toward retirement (after about 15 years of work). Through our personal journey, we feel that anyone can achieve the same, i.e., comfortable early retirement after ~15 years of work, by disciplined investing. The key is to always delineate investment risks by the so-called barbell model as elaborated in my earlier article here . In short, the key is to always maintain a portfolio below your comfortable risk level to guarantee short-term survival. And always build a more aggressive portfolio above it for long-term growth.
Under this context, AAPL is a key holding in our long-term growth portfolio. We do not mind its low dividend yield (only about 0.55%). We do not view it as a tech company either. We do not worry about its quarterly earnings or even its annual new product releases at all. We are only concerned about its long-term economics and moat, such as the aspects to be examined in this article. In a nutshell, we completely resonate with the following comments made by Buffett about AAPL during an interview. You can see the full interview here , full of typical Buffett-style wisdom and a sense of humor. The following is an excerpt and the highlights are added by me. Yahoo Finance: how closely do you follow the company? You know, people are concerned they really have not introduced any new products. Buffett: Well, if you have to closely follow the company, you should not own it in the first place. If you buy a business, say you buy a farm, do you go up and look every couple of weeks to see how far the corn has grown up? Do you worry too much about whether somebody says this year is going to be a year of low corn prices because exports are being affected or something? You know, it does not grow faster if I go and stare at it… Although I do care over the years that it is well tended to in terms of rotating crops. And I hope yields get better. Maintenance CapEx, growth CapEx, and depreciation
A bit of introduction to the basic concepts to facilitate further discussion. For readers who are already familiar with these concepts, definitely skip this paragraph. CapEx expenses for a business are the sum of the maintenance CapEx and growth CapEx. […]