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Apple: Too Big to Grow on Its Own?

By Alex Dumortier, CFA - May 13, 2016 at 12:57PM

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Apple invests $1 billion in Chinese ride-hailing application Didi Chuxing. Is this a change of tack?

U.S. stocks are slightly lower in early afternoon trading on Friday, with the S&P 500 (^GSPC 1.05%) and the Dow Jones Industrial Average (^DJI 1.05%) (DJINDICES: $INDU) down 0.36% and up 0.09%, respectively, at 12:45 p.m. ET. This despite today's evidence of the strength of the U.S. consumer: Not only did retail sales and consumer sentiment beat the consensus estimates, they were both outside the consensus range, according to data from Bloomberg. One stock benefiting from improved sentiment today is that of Apple, which announced a $1 billion investment in Chinese ride-hailing application Didi Chuxing; the stock is up 0.58%.

Logo of Didi Chuxing, China's Uber.

Incidentally, Apple's market value dipped below that of Google parent Alphabet Inc during yesterday's session. This is not the first time, of course: Alphabet overtook Apple for the first time to become the world's most valuable company on Feb. 1.

One might be inclined to think one ought to sell the stock of a company once it becomes top elephant on the basis that its size virtually guarantees under-performance ("[H]uge sums forge their own anchor," as Warren Buffett has written.)

However, as the table below shows, Apple's reign was good for its shareholders, and Alphabet has also performed very well since it first wore the crown (albeit fleetingly):

Company

Date on which it first became most valuable company

Return until being deposed for the first time by a new "king"

Alphabet

Feb. 1, 2016

+35%

S&P 500: +7.7%

Apple

Aug. 10, 2011

+99.3%

S&P 500: +90.4%

Data source: Bloomberg.

But back to fundamentals and Apple's investment in Didi Chuxing: This is a bit of a head-scratcher for me at this stage, not on the level of Microsoft acquiring Nokia's handset unit, say, or eBay's purchase of Skype, but a head-scratcher nonetheless.

For one thing, why invest in a company that's going up against the top dog in the ride-hailing business, Uber, which itself is investing heavily in developing its activity in China? In fact, it turns out that Didi Chuxing is the Uber of China, boasting 11 million rides a day and close to 300 million users (for comparison, the U.S. started 2016 with a total population estimated at 322 million).

In February, Uber announced that it is losing more than $1 billion a year in China. Didi is unprofitable also, but it claims to have reached breakeven in half of the 400 cities it serves. Furthermore, Didi has some very powerful allies, with China's largest Internet companies, Tencent and AliBaba, as key investors.

Finally, $1 billion is chump change for Apple -- less than 10 days worth of free cash flow in the last quarter.

Historically, Apple has avoided making minority investments, preferring either to acquire companies (or develop the product or technology in-house). However, with $233 billion in cash and equivalents on its balance sheet and narrowing avenues for organic growth, perhaps Apple is revising its approach to capital allocation. Or perhaps this is simply part of its strategy to pry the Chinese market open wider (last month, Beijing shut down iTunes and iBooks in China). Either way, Tim Cook has probably earned the benefit of the doubt.

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