Apple is pouring $500 billion into the tech "arms race," but what impact does this have on the company's finances?

Yesterday, Apple made its largest commitment in the United States to date, announcing that it will invest over $500 billion in the U.S. over the next four years and create approximately 20,000 new jobs, potentially escalating the technology "arms race" once again. Bank of America Merrill Lynch believes that despite the massive scale of the investment, it will not affect Apple's capital return plan, and expects future free cash flow to remain strong, with shareholder return levels likely to continue at similar levels.

On February 24, Bank of America Merrill Lynch analysts Wamsi Mohan and Ruplu Bhattacharya released a research report stating that Apple's large-scale investment will focus on manufacturing, research and development, and original content, but the vast majority may not be incremental spending, rather it is already on Apple's spending roadmap, just that some of the spending may now be shifted to the U.S.

Investment Focus: Manufacturing, R&D, and Original Content

Specifically, Apple's investment plan involves multiple areas:

First, in manufacturing, Apple will collaborate with manufacturing partners (possibly including Foxconn) to begin producing servers in Houston later this year. The plan includes opening a 250,000 square foot server manufacturing facility by 2026 to support Apple's Apple Intelligence and private cloud computing.

Second, Apple plans to double the size of its Advanced Manufacturing Fund in the U.S. from $5 billion to $10 billion. The expansion of this fund includes a multi-billion dollar commitment to TSMC's production of advanced chips at its Fab 21 facility in Arizona. Analysts believe this investment may also benefit Apple's partners, including Corning.

Additionally, Apple plans to establish an academy in Michigan to train the next generation of American manufacturers.

In terms of R&D and content creation, the $500 billion investment may also include spending on R&D, data centers, supply chain support, training, and producing original content (movies and shows) for the Apple TV+ service.

Apple's commitment to creating 20,000 new jobs will primarily focus on areas such as R&D, chip design, software development, and artificial intelligence/machine learning.

It is worth noting that this is not Apple's first announcement of a large-scale investment plan. In 2018 and 2021, Apple announced investments of $350 billion and $430 billion over five years, respectively, and both times announced the hiring of 20,000 people. The scale and time span of this investment have increased compared to previous announcements.

Cash Returns Likely Unaffected, Limited Incremental Investment

Despite the massive scale of the investment, analysts believe it will not affect Apple's capital return plan. Over the past five years, Apple has spent an average of about $100 billion annually on stock buybacks and dividends. Future free cash flow is expected to remain strong (over $100 billion annually), and shareholder return levels may continue at similar levels.

Regarding incremental investment, the report points out that a large portion of the $500 billion investment may not be incremental spending, as investments in R&D, data centers, supply chain support, training, and other categories are likely already included in Apple's spending plans, with the company possibly shifting some spending to the U.S Bank of America Merrill Lynch stated that it remains optimistic about Apple's long-term development prospects, maintaining a "buy" rating with a target price of $265, which also indicates that Apple has a 7.2% upside potential. As of now, Apple’s stock has risen 0.37% in after-hours trading.