Apple, which has $145 billion of cash, said yesterday it plans to use debt to help finance a $100 billion capital reward for shareholders after a 42 percent stock plunge. Moody’s Investors Service and Standard & Poor’s responded by ranking the company a level below their top grades, with Gerald Granovsky of Moody’s citing “shifting consumer preferences” in a statement as a risk to Cupertino, California-based Apple’s business.
For the most part, I’m sympathetic to Wall Street’s concerns about Apple’s business (see Benedict Evan’s excellent write-up of the Apple bear case here). You can argue that Apple is a special case (I characterized it as a Black Swan) but history would suggest that Apple’s hyper-growth – and in simplistic terms, stock price is about expected growth – is probably over. All fair.
That said, credit ratings are about the stability of cash flow, not future growth. What the credit agencies are saying is that Apple is in a hits-driven hardware business and is at constant risk of customer defection to “The Next Big Thing.”
This justification for Apple’s credit rating belies a fundamental misunderstanding of technology generally and Apple specifically. Apple may make money on hardware, but “customer preference” is absolutely not driven by hardware alone. Technology is about ecosystems, and the winner is the platform that best meets consumers’ hierarchy of needs:
Hardware is a part of the hierarchy, but it’s a baseline (and the credit agencies are right that it’s not particularly sticky). Apple’s strength is in software and apps, and because of that their current customer base isn’t going anywhere. The inability for the credit agencies to comprehend this illuminates why they were so helpful in submarining the entire financial system.
One more quick aside:
“With consumer technology, whenever we think that this is the greatest product ever, you wait five to 10 years and that company is no longer at the top,” Granovsky of Moody’s said. “Triple-A is reserved to companies where we believe the business is highly stable.”
Microsoft has a AAA rating; it’s an interesting thought exercise to consider who is more likely to be in better shape in five to ten years (and before you dismiss Microsoft, Windows is only about a quarter of their revenue; they’ve diversified in a way Apple never will).