Apple's Aversion to AI Spending Masks Hidden Risks

Apple's capital expenditure is a notable exception in the tech industry, which has seen significant investments in artificial intelligence infrastructure. The company spends only 3% of its revenue on capital expenditure, whereas Microsoft and Alphabet spend 35% and 29.7%, respectively.

A closer look at Apple's financials reveals that the company's free cash flow has remained relatively flat over the past four fiscal years, ranging from $99.6 billion to $111.4 billion. In contrast, Microsoft's revenue grew by more than a third during the same period, but its free cash flow fell.

Apple's growth comes primarily from its services segment, which has seen a 59.6% increase in revenue over the past four years and now accounts for 26.2% of the company's total revenue. The services segment carries higher margins than hardware, contributing to Apple's overall gross margin expansion.

The difference between Apple's earnings per share (EPS) growth and its business growth is largely due to the company's buyback program, which has reduced the number of outstanding shares by 11% over the past five years. This means that 44% of Apple's EPS growth came from the buyback rather than actual business performance.

Apple's current share price assumes a significant re-acceleration in revenue and free cash flow, which has not yet appeared in the company's financials. A discounted cash flow model built on Apple's own figures suggests that the current market price is overvalued compared to historical growth rates.