Breakingviews: Apple has a cash problem

Apple has a cash problem. Not that it is lacking: The $2.8 trillion company produces over $100 billion of excess cash a year. But last week’s reveal that its top line shrank 4% last quarter – and an underwhelming event on Tuesday that launched upgraded iPads and a new Apple Pencil – show the company’s quandary. Tim Cook’s firm needs a better long-term growth plan. Investing in AI may be necessary, but it’s also too risky to go full steam ahead.

Beefing up artificial intelligence capabilities seems like a natural way to launch into the next decade. Apple has grown its services division, but it is still primarily a device company, as Tuesday’s event showed. People want gadgets that are more convenient and smarter, and they expect Apple to be a leader.

The trouble is technology rivals like Microsoft and Alphabet have a clearer path to making AI initiatives lucrative. Their cloud computing platforms are used by firms like OpenAI to train and run services, making them the backend engine of the new tech. That is already churning out revenue. Conversely Apple, like Meta Platforms, doesn’t know exactly what customers want. Apple could turn a headset from curiosity to must have. But the timeline for delivering the goods is unclear, and the payoff uncertain.

Apple has been plowing more cash into products. Research and development spending as a percentage of sales has nearly tripled to 9% over the past 10 years. Yet shareholders haven’t been rewarded. Share performance has lagged Microsoft.

So Apple for now is sticking to its comfort zone. It has sent almost $500 billion back to investors via dividends and buybacks over five years, over twice as much as $3.1 trillion Microsoft. Last week Apple said it would buy back another $110 billion, sending shares up despite its mediocre performance. Still, the stock’s price to estimated earnings over the next 12 months is 26 times, according to LSEG, double a decade ago. Investors expect Cook’s company to be more than a cash cow.