Apple’s Didi Investment Signals That It Could Get More Creative With Its Cash

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Apple (NASDAQ:AAPL) has invested $1 billion in fast-growing Chinese ride-hailing service Didi Chuxing. Although the deal is not particularly material for a company of Apple’s size, it marks a significant departure from Apple’s strategy of investing in or acquiring small companies that develop technologies that it can deploy in its products and services. We believe that this is positive for Apple’s stock, since it signals that the company could get more creative in deploying its $233 billion cash hoard beyond its share buyback program and low-yield fixed income securities.

We have a $127 price estimate for Apple, which is significantly ahead of the current market price.

See Our Complete Analysis For Apple Here

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Looking Beyond Just Capital Returns And Low-Yielding Assets

Apple’s cash balance has almost doubled over the last four years, and the company is having trouble finding optimal avenues to invest its growing resources. The weighted-average interest rate Apple earned on its cash, cash equivalents and marketable securities stood at just 1.49% in fiscal 2015. [1] Apple’s expanding capital return program, which was instituted in August 2012, has also yielded mixed results. While Apple’s share buybacks ($117 billion through March 2016) have helped to boost its EPS, they have not been effective in bolstering Apple’s stock price. While the company’s stock has remained essentially flat between mid-August 2012 and May 2016, the NASDAQ index has gained over 50%, while the stock of Google’s holding company Alphabet has soared by over 100%.

Apple’s buybacks make sense from a financial standpoint, given its high earnings and cash flow yield, but the markets seem to be discounting the value of its stock – assigning it a relatively low multiple – given that the company’s fortunes are largely tied to the iPhone business, which is expected to decline this year. The Didi Chuxing investment could signal a new approach to investing for Apple, one which could eventually benefit its stock. Deals such as these allow Apple to diversify its investments, while providing some strategic benefits and potentially attractive long-term returns. Moreover, Apple’s brand, track record and technological expertise could make it a valuable stakeholder for smaller companies, which could in turn give the company access to some of the most attractive investment opportunities in the tech sector.

What Can Didi Bring To The Table For Apple?

Didi is China’s largest ride-haling company by far, holding about 87% share in the country’s private car hailing market. The firm handles over 11 million rides per day, with a user base of roughly 300 million across China. While the specific rationale for Apple’s investment in Didi has not been publicly stated, CEO Tim Cook has noted that the investment could enable potential future collaborations and give Apple a chance to gain an understanding of certain segments of the Chinese market. [2] Apple launched its mobile payment service, Apple Pay, in China earlier this year, and the company could work to integrate the service with Didi’s app in order to drive adoption. Didi has also formed an international coalition with Lyft, India’s Ola Cabs and Singapore’s Grab, which could provide an opportunity for Apple to work with these companies as well for payments and mapping services. While it remains unclear how much influence Apple will have with Didi – the funding round is reportedly being carried out a valuation of $25 billion, implying that Apple’s stake is likely under 5% – the deal does provide Apple investors some reasons for optimism. [3]

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Notes:
  1. Apple Form 10-K []
  2. Apple invests $1 billion in Chinese ride-hailing service Didi Chuxing, Reuters, May 2016 []
  3. Apple Backs Didi With $1 Billion in Blow to Uber China Ambitions, Bloomberg News, May 2016 []