I have been very vocal about Moats in technology companies and have written that Apple has a small moat. Recently I learnt about a Moat that Apple has and it is not a technology moat but of financial and supply chain.
There is a whole article about it but I want to summarize it here.
A company like Apple buys electronics spares from a manufacturer in China, asks another supplier to make their iphone and finally puts it on sale on the Apple Store.
Note: The below quoted lines from the newsletter linked below.
“Assuming company takes 50 days to sell a new product and another 10 days to collect cash from the customer after the sale but pays its suppliers 20 days after first purchasing the product to re-sell. In this example, this hypothetical company has a cash conversion cycle of 40 days (50+10-20).”
This is a common scenario and for a company like Macys this is about 50-60 days.
Now, imagine a company which pays their their supplier 50 days after your customer has paid them. That means, this company without spending any money gets a product from the supplier, sells it to the customer, collects the cash and after 50 days of collecting cash, pays their supplier. That is a dream company. These companies are said to have a negative cash conversion cycle. Interestingly, Apple is one such company. You can see how Google, Microsoft and Walmart’s Conversion cycle numbers.
This capacity to make money without spending any money could be called a Moat. Can this Moat deteriorate ? Yes, but not that quickly.
Now after learning this, I must be really dumb not invest again in Apple at the current prices and given that the markets are going down as we speak.
So yours truly is again an Apple shareholder.
Here is the complete article about Apple’s Cash Conversion Cycle.