When analysts comb through Apple’s financial results, most of the focus tends to be directed to the standard P&L line items: revenues, margins, earnings. In some cases, debt and cash balances also receive some attention.
There is one piece of the cash flow statement, however, that rarely ends up being discussed. The Apple Maven has observed that capex, officially known as “payments for acquisition of property, plant and equipment” (or PP&E), skyrocketed last quarter.
What could be behind the recent spike in Apple’s capital spending?
Capex: what is it?
First, let’s define capital expense. Capex is a cash disbursement made to acquire property, which in turn gets depreciated or amortized over time. Property, in this case, can be tangible (buildings, machinery) or intangible (software for internal use).
Apple does not break down the types of capital investments that it makes each quarter. However, we know that, as of fiscal first quarter 2021, about three-fourths of the company’s PP&E at book value consisted of machinery, equipment, and software. The rest was land, buildings, and improvements.
The surge in Apple’s capex
The graph below shows that Apple spent about $3.5 billion in capex in the last quarter alone. This is the most that the company has invested in property in a single three-month period since 2018. Also notice that the spike broke a three-year long downward trend.
To put this number in perspective, Apple currently holds a net cash balance of about $84 billion (including cash equivalents, excluding debt). At last quarter’s run rate, Apple has been spending nearly one-fifth of its net cash pile in capital projects per year.
One can only speculate what may be happening behind the scenes. One hypothesis is that capital investments during the pandemic year took a back seat to cash preservation. Now, the project backlog is finally moving again. COVID-19 does not explain, however, why capex had been declining since 2018.
Another possibility is increased production capacity to accommodate the newly launched Mac devices with internally developed M1 chip. As a reminder, Apple has announced that it would no longer equip its 13-inch MacBook Air and Pro with Intel hardware. The ARM-based architecture will likely be rolled out to Apple’s other laptop and desktop models as well.
Something big ahead?
Then, there is the possibility that Apple might be getting ready for something big ahead. According to Bernstein analyst Toni Sacconaghi, Apple “has historically invested in gear, effectively financing third-party operations in exchange for secure production capacity for hardware components”.
Could the Cupertino company be ramping up production capacity for its existing products – or, even more intriguing, for something new altogether? Or will this jump in capex prove to be just noise in an otherwise declining trend in Apple’s capital investments?
It is hard to tell for sure, but one thing is certain: I will pay closer attention to this under-the-radar cash flow line when Apple reports fiscal second quarter results, late in April.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)