This Is Apple's Real Problem

05/02/2013 8:30 am EST


Jim Jubak

Founder and Editor,

With the release of Apple's earnings, the debate continues about its future and their new products, but MoneyShow's Jim Jubak points out that the company's real problem has almost nothing to do with the company itself.

We all know Apple (AAPL) has a problem, but you’re probably focused on the wrong problem.

You’re probably focused on, well, is the iPhone 6 going to come out too late? Is it going to be any good? Is the Samsung Galaxy S4 going to eat up market share? Are margins falling?

OK, all those things are true. But Apple’s big problem is that it’s got all this cash stashed overseas that it can't really repatriate easily. So it’s sitting on a lot of money, but it really can’t do much of anything with it.

One way around this, basically, is for Apple to declare a dividend—which they’ve done; they’re going to raise their dividend by 15% and they’re going to use $60 billion to do more stock buyback, so it’s about a $50 billion increase over the previous plan. To do this, because they’ve got so much money overseas they can’t repatriate without having to pay punitive (to them) taxes, they’re going to borrow money. So Apple—which has really no need to borrow money—is going to do a debt offering.

Okay, so now let’s say you’re Standard and Poor’s or Moody’s and you’re looking at Apple. You’re going oh, OK, this company which has zero debt, which has $100 billion and more overseas, which generates $25 billion to $30 billion a quarter, what debt rating do we give it?

The extraordinary thing is that Moody’s and S&P decided that Apple was not worth a AAA credit rating. They gave it only a AA. So if Apple were a country, it would be rated along with the United States.

What I think is really interesting about this is that the argument that these two ratings companies made for not giving Apple the highest rating really doesn’t make a lot of sense. They come down to very subjective things. They come down to "the company’s trying to figure out what the product line's going to be." They aren’t hardnosed financial analysis leading to this conclusion, they’re very, very fudgy—and in some cases you had analysts saying, well, it sort of feels like it shouldn’t be a AAA.

This, I think, tells you more about the rating agencies, companies that we know didn’t do a very good job during the financial crisis. On the current evidence, there’s no reason to think they’re doing a better job now.

I’m not saying that Apple should be a AAA. What I’m saying is that I haven’t heard anything from the ratings companies that suggest that they know what the basis for a rating is, and that worries me. Not just about Apple, but about the whole financial system going forward, because people continue to put faith in these companies and I don’t think they know what they’re doing.

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