Apple’s new boss starts out asset-light and option-rich

This week, John Ternus inherited the top job at Apple, a company whose market capitalisation of $4.6tn makes it one of the world’s biggest. Responsibility for a lot of other people’s wealth now rests in the new CEO’s hands. But consider, too, what Ternus didn’t inherit: an overloaded balance sheet and a habit of incinerating cash.

Under Ternus’s predecessor Tim Cook, Apple mostly sat out Silicon Valley’s rush to load up on physical stuff, such as data centres, servers and chips. It’s not that the iPhone-maker is asset-light in absolute terms — it had about $383bn of total assets on its books at the end of the latest quarter and has been running its own data centres for years. But a big chunk of its worth is made up of cash and tradeable securities.

Zoom in on actual fixed assets, and Apple’s $51bn puts it just 40th in the S&P 500 index, according to S&P Capital IQ data. Moreover, that amount has increased by just 28 per cent over the past four years. That compares with a 285 per cent increase at Microsoft, roughly 200 per cent at Facebook parent Meta Platforms and 180 per cent at Google parent Alphabet.

At its simplest, that’s because Cook focused on making devices and selling services around them, rather than building server-hogging “frontier” AI models from scratch and owning vast cloud computing facilities. While that leaves Apple reliant on others — its Siri AI is powered by Google — investors have rewarded the restraint. The stock trades at 33 times forward earnings, according to LSEG, a premium to the Magnificent 7, excluding the highly speculative Tesla.

Apple’s most valuable assets, though, aren’t the kind that appear on the balance sheet. One is its enormous supply chain, encompassing devices and the chips that power them, with thousands of facilities in more than 60 countries, Managing that — especially the portion based in China — will continue to be a challenge, especially given the company’s persistent supply constraints and rising input prices, but it remains a footprint hard for others to replicate.

Then there’s the future value of a sticky user base consisting of more than 2.5bn active devices. After all, AI models need devices on which to run, and Apple is already hard-wired into users’ daily routine. Ternus is a hardware expert, which augurs well for Apple’s next generation of products, from foldable phones and headphones fitted with cameras to the tabletop robots expected next year.

The greatest asset Ternus inherits is optionality. Apple is expected to make $156bn of free cash flow in 2027, according to analysts polled by Visible Alpha, which he could reinvest in product design, acquisitions or manufacturing improvements. In contrast, Meta, Alphabet, Amazon and Elon Musk’s SpaceX, all busily blanketing the world with data centres, will collectively burn $185bn. That leaves the new Apple boss well placed to zig while his peers zag.

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