Economy

$1 Trillion!? Dissecting Apple's New Money Milestone

Tim Cook's company has broken a stock market record, but a closer look at Apple's operating numbers tells a more nuanced story.

Apple store in NYC
Apple store in NYC
Shira Ovide

NEW YORK — Apple Inc. was a profit geyser well before it reached the $1-trillion value mark on Thursday. Even Warren Buffett is impressed. "It is an unbelievable company," the legendary investor and Apple stockholder said in May as he marveled that Apple earns almost twice as much as the second-most profitable U.S. company.

Buffett is right. Apple reported $68 billion in profit before taxes and non-operating items in the last year. In distant second place is JPMorgan Chase & Co. with $39 billion in operating profit.

But this isn't another tale of Apple's impossible-to-believe profit power, because Apple isn't the powerhouse that it used to be.

Apple is now a tale of incredibly shrinking profit margins. Apple generates less profit from each dollar of sales than it did in 2010, when it was worth one-quarter as much. Investors most likely won't care as long as Apple keeps growing and as long as it continues to churn out eye-popping earnings on an absolute basis. But the slimming margins are a potential warning sign as Apple hits the $1 trillion mark, which reflects investor expectations of fat profits for years to come.

Apple isn't the powerhouse that it used to be.

The biggest reason for the profit margin diet is Apple's spending. Its operating costs have increased at twice the rate of revenue in the last five years, and the company doesn't detail why. Growth is coming from different sources, too, notably iPhone price increases and sales of ancillary products. Those changes are giving Apple a fundamentally different financial look, and investors haven't yet been forced to confront how much this altered Apple should be worth.

Apple's shifting profit character is dramatic. In the 12 months ending in June, Apple generated 26.6 cents of profit from its business operations for each dollar of sales. That was the lowest operating profit margin since 2009, Bloomberg data show. As a share of revenue, its free cash flow — the net cash generated by its business minus costs of big-ticket projects such as manufacturing equipment and corporate facilities — is also near its lowest point since 2009.

Even relative to other corporate titans, Apple has lost a step. Five years ago, Apple ranked 40th among companies in the S&P 500 Index by its annual operating profit margins, according to Bloomberg data. Now the company stands 113th. Apple is squeezing lower profits per dollar than the energy drink company Monster Beverage.

Tim Cook introducing the iPhone X in September — Photo: Xinhua/ZUMA

The reason for the margin squeeze isn't Apple's release of more products packed with expensive parts and technology. Although several key iPhone components are costing Apple more, the company's total revenue minus the basic costs to make its products hasn't budged much. The biggest cause of Apple's shrinking margins is its research and development costs.

Five years ago, Apple was spending about $4 billion a year on research and development, or about 3% of its sales. On a percentage basis, that was far lower than other U.S. technology companies. In the last 12 months, Apple's R&D spending amounted to 5.3% of its sales. While that's still low by tech superstar standards, it's a significant shift for Apple.

Steve Jobs once said that "innovation has nothing to do with how many R&D dollars you have." Except now it seems as if Apple is putting its foot on the R&D gas, hoping the result will be more innovation.

It's true that technology investors want and expect technology companies to invest in the future. The U.S. technology titans are in an arms race, battling with engineer hiring and capital spending to build their capabilities in artificial intelligence, driverless cars, cloud computing and other areas they consider crucial to maintain and extend their dominance. In 2015, the investor Carl Icahn wrote that Apple's rising R&D spending "should signal to investors that Apple plans to aggressively pursue" growth opportunities.

The problem is, it's tough for outsiders to assess whether Apple's climbing R&D spending is being put to good use. The company is notoriously, mostly understandably secretive about what it's cooking up in its gadget labs. In the past, Apple has developed crucial innovations in-house, both highly visible ones like iPhones and iPads and less-celebrated innovations such as Apple's line of self-developed computer chips. Now the company may be splurging on areas such as health care, transportation, new forms of computing and more. It's always tough to assess the return on R&D investment, and it's doubly hard for Apple.

There's a disconnect between the investment narrative about Apple and its profit reality.

Apple's rising research-and-development tab isn't a problem now, and it may never be. The company has found clever ways to keep boosting its revenue even as smartphone sales stall across the industry. Apple's profits and cash flow continue to pile up, and they are the envy of the corporate world.

When a company stumbles, however, spending that once seemed like the standard cost of doing business can come under a microscope. When an activist investor came after Qualcomm a few years ago, it questioned whether the chipmaker should cut its R&D spending to improve profits. If Apple hits a growth wall in coming years, it's not hard to imagine the company facing similar calls to justify its climbing research-and-development bills.

There's a disconnect between the investment narrative about Apple and its profit reality. Wall Street has been excited about the growing share of company revenue coming from its services segment, which includes app sales and Apple Music subscriptions. Those are billed as higher-margin businesses, but because of Apple's spending the company's margins have actually been decreasing. Even as investors stare at those 12 zeros in Apple's market value, it's tough to argue that the company deserves an even richer valuation, as long as those margins stay squeezed.

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Geopolitics

How Thailand's Lèse-Majesté Law Is Used To Stifle All Protest

Once meant to protect the royal family, the century-old law has become a tool for the military-led government in Bangkok to stamp out all dissent. A new report outlines the abuses.

Pro-Democracy protest at The Criminal Court in Bangkok, Thailand

Laura Valentina Cortés Sierra

"We need to reform the institution of the monarchy in Thailand. It is the root of the problem." Those words, from Thai student activist Juthatip Sirikan, are a clear expression of the growing youth-led movement that is challenging the legitimacy of the government and demanding deep political changes in the Southeast Asian nation. Yet those very same words could also send Sirikan to jail.

Thailand's Criminal Code 'Lèse-Majesté' Article 112 imposes jail terms for defaming, insulting, or threatening the monarchy, with sentences of three to 15 years. This law has been present in Thai politics since 1908, though applied sparingly, only when direct verbal or written attacks against members of the royal family.


But after the May 2014 military coup d'état, Thailand experienced the first wave of lèse-majesté arrests, prosecutions, and detentions of at least 127 individuals arrested in a much wider interpretation of the law.

The recent report 'Second Wave: The Return of Lèse-Majesté in Thailand', documents how the Thai government has "used and abused Article 112 of the Criminal Code to target pro-democracy activists and protesters in relation to their online political expression and participation in peaceful pro-democracy demonstrations."

Criticism of any 'royal project'

The investigation shows 124 individuals, including at least eight minors, have been charged with lèse-majesté between November 2020 and August 2021. Nineteen of them served jail time. The new wave of charges is cited as a response to the rising pro-democracy protests across Thailand over the past year.

Juthatip Sirikan explains that the law is now being applied in such a broad way that people are not allowed to question government budgets and expenditure if they have any relationship with the royal family, which stifles criticism of the most basic government decision-making since there are an estimated 5,000 ongoing "royal" projects. "Article 112 of lèse-majesté could be the key (factor) in Thailand's political problems" the young activist argues.

In 2020 the Move Forward opposition party questioned royal spending paid by government departments, including nearly 3 billion baht (89,874,174 USD) from the Defense Ministry and Thai police for royal security, and 7 billion baht budgeted for royal development projects, as well as 38 planes and helicopters for the monarchy. Previously, on June 16, 2018, it was revealed that Thailand's Crown Property Bureau transferred its entire portfolio to the new King Maha Vajiralongkorn.

photo of graffiti of 112 crossed out on sidewalk

Protestors In Bangkok Call For Political Prisoner Release

Peerapon Boonyakiat/SOPA Images via ZUMA Wire

Freedom of speech at stake

"Article 112 shuts down all freedom of speech in this country", says Sirikan. "Even the political parties fear to touch the subject, so it blocks most things. This country cannot move anywhere if we still have this law."

The student activist herself was charged with lèse-majesté in September 2020, after simply citing a list of public documents that refer to royal family expenditure. Sirikan comes from a family that has faced the consequences of decades of political repression. Her grandfather, Tiang Sirikhan was a journalist and politician who openly protested against Thailand's involvement in World War II. He was accused of being a Communist and abducted in 1952. According to Sirikhan's family, he was killed by the state.

The new report was conducted by The International Federation for Human Rights (FIDH), Thai Lawyer for Human Rights (TLHR), and Internet Law Reform Dialogue (iLaw). It accuses Thai authorities of an increasingly broad interpretation of Article 112, to the point of "absurdity," including charges against people for criticizing the government's COVID-19 vaccine management, wearing crop tops, insulting the previous monarch, or quoting a United Nations statement about Article 112.

Juthatip Sirikan speaks in front of democracy monument.

Shift to social media

While in the past the Article was only used against people who spoke about the royals, it's now being used as an alibi for more general political repression — which has also spurred more open campaigning to abolish it. Sirikan recounts recent cases of police charging people for spreading paint near the picture of the king during a protest, or even just for having a picture of the king as phone wallpaper.

The more than a century-old law is now largely playing out online, where much of today's protest takes place in Thailand. Sirikan says people are willing to go further on social media to expose information such as how the king intervenes in politics and the monarchy's accumulation of wealth, information the mainstream media rarely reports on them.

Not surprisingly, however, social media is heavily monitored and the military is involved in Intelligence operations and cyber attacks against human rights defenders and critics of any kind. In October 2020, Twitter took down 926 accounts, linked to the army and the government, which promoted themselves and attacked political opposition, and this June, Google removed two Maps with pictures, names, and addresses, of more than 400 people who were accused of insulting the Thai monarchy. "They are trying to control the internet as well," Sirikan says. "They are trying to censor every content that they find a threat".

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