The Apple logo is seen at a company store in an upscale shopping mall in Bangkok
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Apple has cut roughly $5 billion from its heavy spending on infrastructure over the past two years, boosting its cash flow by 10% and expanding its margins.
The company (ticker: AAPL) has been reducing outlays on manufacturing equipment for its suppliers in China, where it has historically invested in gear, effectively financing third-party operations in exchange for secure production capacity for hardware components, according to a Tuesday note from Bernstein analyst Toni Sacconaghi. The analyst calculated that a decline in capital expenditures had generated an additional $6 billion in non-GAAP free cash flow over the past two years.
Apple stock was flat in Tuesday trading, falling less than 0.1% to $120.22. Shares of the iPhone maker have gained more than 60% this year.
In the note, Sacconaghi wrote that about 75% of the company’s capital spending has typically gone into machinery, equipment, and internal-use software. Data centers and tooling and machinery for its suppliers are the two biggest drivers of such spending, he said.
Sacconaghi said that after several conversations with Apple, his team concluded that capital spending isn’t likely to return to prior historical levels in the near future.
Wall Street estimates that Apple’s capital expenditures will increase to $10.81 billion in fiscal 2021, from $7.31 billion in 2020. Analysts forecast a further modest rise to $10.93 billion in 2022.
Apple said to the analyst that its reduced expenditures were related to its environmental, social and corporate governance initiatives. Sacconaghi said that his team suspects that the main reason for the reduced spending is that Apple is now more confident it can source components for its various pieces of hardware, and no longer needs to finance its manufacturing partners.
The reduction in capital spending will benefit the company’s free cash flow too, the analyst wrote. Sacconaghi wrote that he expects margins to improve by nearly 0.7 percentage point in 2020, and by about 0.4 percentage point in 2021. He cautioned that reducing investments in its manufacturing partners could lead to higher prices for some components Apple uses.
Sacconaghi rates Apple the equivalent of a Hold, and has a target of $100 for the stock price. Among the analysts that cover Apple, 25 rate the stock at Buy, 11 have it at Hold, and three rate it a Sell. The average target for the stock price is $125.32, which implies a potential gain of 4.2%.
Write to Max A. Cherney at [email protected]
