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As Online Retailers Launch Vendor Financing, Is Apple Credit Corp Imminent?

Tyler Durden's picture





 

As we have been saying for over a year now, there are two key issues (one of which follows logically from the other) that central bankers are banging their heads against: the increasing scarcity of money good-assets, i.e., credible collateral, that can be pledged in exchange for debt at both the private and public level, and the collapsing cash flows at the corporate and household level (both incidentally direct artifacts of ubiquitous central planning and central banker intervention). This, among various other reasons chief among which is the parallel collapse in CapEx and R&D spending at the corporate level, is the main reason for the now secular decline in corporate revenues, which in turn will impact corporate profitability for years to come (now that the easy cost cuts have been made and firms have no choice but to cut into the muscle), and why any expectations that currency dilution will transform into higher profits in a time when input costs rise far more aggressively than revenues, are merely pipe dreams, as is the market's obsession with expanding PE multiples. Perhaps the best confirmation that the much needed cash flows continue to not materialize, is the news that first Amazon, and now Google, are slowly migrating to a model of vendor financing, whereby they provide credit to their product and service vendors to stimulate top line growth. And while this may boost AMZN and GOOG stock price briefly, all it indicates is what we have all know for a long time: the US consumer is once again tapped out, and is unwilling and/or unable to spend money at the rate needed to justify either the forecast S&P earnings or the applied multiple, confirming fundamentals are even more disjointed from market surreality than previously expected.

From the FT:

Google is getting into the credit business for the first time, with the launch on Monday of a programme in the UK to finance purchases of its search advertising by businesses.
 
The move marks the opening of a new front in the battle between the biggest internet companies, as they turn to their balance sheets as a source of competitive advantage. Amazon said last week that it had begun making loans to independent sellers that offer their products on its marketplace, marking the online retailer’s first move into financial services.

Google’s decision to issue its own credit card, which will also be made available in the US within weeks and other unspecified countries later, signals the company’s first attempt to use its huge cash reserves to support its core search advertising business by subsidising low-interest rate credit lines.
 
It said it would offer customers credit of between $200 and $100,000 a month to pay for their use of Adwords, which places messages next to the results in its search engine and made up the bulk of its $37bn in advertising revenues last year.

Where it gets downright scary however, is the admission of Google's Treasuer for the reason why Google is entering the crediting business:

They weren’t buying Adwords as much as they need to,” said Brent Callinicos, Google’s treasurer. A pilot lending programme begun in the US a year ago had led to customers advertising more, he added.

Or, stated differently, we have crossed the IRR threshold where without Google's model no longer generates the rate of return our shareholders demand of it. The same shareholders who recently pushed Google to its all time high price and who are perfectly oblivious to this very disturbing dynamic below the otherwise shiny surface.

As for Amazon's endless "diversification" strategy, no surprise there. The one time retailer, which is now into video streaming, cloud sharing, stock exchanging, who knows what else and recently entered the real estate business, has been desperate to expand into something, anything, that will boost its meager profitability, so far without success. The time to experiment may have now run out, since AMZN now too has to provide debt to lever up its "vendors":

Amazon also indicated that its lending was aimed at credit-starved
businesses that would otherwise struggle to finance initiatives such as
expanding the inventory of products they sold on its site.

“We’re
providing a solution to a problem that is vexing many sellers,” Amazon
said. “A lack of access to cash can inhibit their growth.”

What is left unsaid, is that a lack of cash will lead to a lack of transactions, and a lack of commissions which will immediately crash AMZN's already razor thin margins.

Finally, the admission that corporate cash now has to be used to fund the lowest possible returning IRR project, where discharges and bad loans will soon galore as the ongoing depression once again strikes with a vengeance, in the process crippling long-term profitability prospects, will not be easy to extract. Instead we get spin:

Google executives did not rule out going deeper into financial services with the provision of more lending products to the small and medium-sized businesses that make up the bulk of its 1m search advertising customers, though they said the company was not planning any moves at present.

 

“We are helping them, uniquely, with online marketing – we aren’t going into a finance business as Google,” said Francoise Brougher, vice-president of sales and operations for small and medium businesses at Google.

Of course not. For now. Because suddenly those massive growth multiples will have to be dramatically readjusted, not to mention starting to value online "retailers" as... banks?

Which finally brings us to the topic of Apple, and its Braeburn hedge fund, which for the time being is allocating its $120+ billion cash stash for safe purposes. How long before shareholders demand a boost to ROEs and insist that Apple pull an AMZN and/or GOOG, and launch Apple Credit Corp, providing credit cards that can only be used to purchase AAPL products?

If we were betting people we would say 3-6 months...

P.S. the currently offered Barclaycard financing option for Apple product purchases is not the same, as the balance sheet risk lies with Barclays, not with Apple's balance sheet. Soon that will change.

 


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Mon, 10/08/2012 - 10:39 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Apple seeking "too big to fail status".  Hey, at least they will be selling you some precious metals with that computer purchase.

Mon, 10/08/2012 - 10:42 | Link to Comment holdbuysell
holdbuysell's picture

LoP...was thinking exactly the same thing...see below.

Mon, 10/08/2012 - 11:16 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Banks are now giving physicians the "opportunity" to finance their patient's medical bills.  To be clear, the physician is liable to the bank should the patient not pay.

Mon, 10/08/2012 - 11:17 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Correct HH.  Nothing changes until the supply lines start breaking at this point.

Mon, 10/08/2012 - 11:22 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Physican, repossess thyself.

Comerica Bank is really pushing this hard right now, with deductibles and co-insurance skyrocketing.

Mon, 10/08/2012 - 10:47 | Link to Comment DeadFred
DeadFred's picture

Will AaplFinance let me buy a song on iTunes with credit? That would be sweet. Play now, pay later- the American Dream.

Mon, 10/08/2012 - 12:06 | Link to Comment slaughterer
slaughterer's picture

iTunes already requires a credit card on permanent file to buy apps/video/music.  

Mon, 10/08/2012 - 22:01 | Link to Comment RichardP
RichardP's picture

Not if you buy using an iTunes card that you can purchase almost anywhere.  I know folks who buy tunes all the time and they have no credit card on file with the iTunes store or Apple.

Mon, 10/08/2012 - 10:41 | Link to Comment holdbuysell
holdbuysell's picture

Apple and Google: Here comes TBTF 2.0

Mon, 10/08/2012 - 10:41 | Link to Comment IndicaTive
IndicaTive's picture

Finance that $70 battery change on your Icard at a mere 24% interest.

Mon, 10/08/2012 - 10:41 | Link to Comment PUD
PUD's picture

FIRE economy..the financialization of everything. The bankers mission statement...to get as many as possible in as much debt as possible for as long as possible at as high a cost as possible. Money as debt...the root of all the problems.

Mon, 10/08/2012 - 11:23 | Link to Comment Offthebeach
Offthebeach's picture

( In Fay Dunaway voice )
It's money...it's credit...it's money.

Mon, 10/08/2012 - 10:43 | Link to Comment edifice
edifice's picture

Apple is already partnered with Barclays, via its Juniper subsidiary, to issue iDebt. It has been for a very long time. It is a Platinum card (at around 17% APR) which may be used to purchase anything, not just iCrap. I suppose Apple issuing its own credit is inevitable. Like the car companies, who started out producing vehicles, then became banks who made cars.

Mon, 10/08/2012 - 11:38 | Link to Comment franzpick
franzpick's picture

Let's see, GM did so well offsetting their car losses with their housing-boom beneficiary GM acceptance corp, GMAC.    Apple Inc. could repeat that success with, say, AIAC, or iPhone AC, iPAC, or AEiOU, or maybe just iPAY.  Thought we were past the end stage of the 40 year credit binge, but lookee here.

Mon, 10/08/2012 - 10:43 | Link to Comment PUD
PUD's picture

AAPL and GOOG will get a banking license in 3 days just like Capital One and the other money changers did. Full taxpayer backstop 

Mon, 10/08/2012 - 11:03 | Link to Comment Urban Redneck
Urban Redneck's picture

The CIA probably has a couple it can spare...

Mon, 10/08/2012 - 12:07 | Link to Comment slaughterer
slaughterer's picture

AAPL-CIT merger would be nice.  

Mon, 10/08/2012 - 10:44 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

Usury is the ultimate business it seems

The product an excuse to debt-enslave the buyer

May these companies all get the default rates they deserve

Mon, 10/08/2012 - 11:20 | Link to Comment Stoploss
Stoploss's picture

Don't leave out avarice.   ;)

Avarice and usury and precaution must be our gods for a little longer still.

Samsung Galaxy note, everyone should try one. It caused me to swap the new EVO i just got for the Note.

Both awesome devices, but you can land an air hogs heli on the note if necessary, plus i liked the stylus feature on the note.

Go to radio shack, get a note, wait for an iphone 5 customer to come in, start playing with the note in front of iphone customer. Let notes live (speaking) gps guide you out of the store to your car. Watch new note customer walk out with big smile and celebrating the 75$ reduction in plan expense by switching.

There better be a National Bank of Apple in the pipeline, cause sammy is the shit.

Mon, 10/08/2012 - 10:51 | Link to Comment williambanzai7
williambanzai7's picture

The question is whether these technology companies should be subsidizing the credit operations of the banks or doing it themselves.

The banks are just parasites on businesses and predators to consumers.

Credit cards are going to be relics in the next several years as credit exchange migrates to networks.

Tisk tisk TBTF...Fuck EM.

Mon, 10/08/2012 - 11:06 | Link to Comment kridkrid
kridkrid's picture

I agree with you, if I'm hearing you correctly. If credit is to come from somewhere, better to come from the manufacturer of the thing than a bank, IMO. Of course, the point of the article was that the world is fucked as we try to squeeze every last ounce of future labor into current consumption to support a world that can't be sustained. So by that account, nothing really matters... The crash is coming.

Mon, 10/08/2012 - 13:10 | Link to Comment Raymond K Hessel
Raymond K Hessel's picture

In running a finance company for the purpose of supporting the main business line of the parent company, I agree this would be a better way to finance since the parent company directs the finance company to operate to support sales of the parent company, even if it runs at a loss.  UPS does this.  Years ago they bought a small Connecticut bank and used it to provide financing to their customers.  It was proven that the finance company runs at a loss but that's okay because it operates to help UPS sell more freight services.  That's the true purpose of finance in commerce.  Not the shit that banks and payday loan companies pull nowadays.

Mon, 10/08/2012 - 10:52 | Link to Comment Dr. Engali
Dr. Engali's picture

Unfortunately the people are stupid enough to jump on the opportunity to finance an Apple device, which will quickly be outdated 6 months after they buy it. Apple has a good thing going for itself there.

Mon, 10/08/2012 - 17:31 | Link to Comment GCT
GCT's picture

Only if your into buying over rated apple products Doc!

Mon, 10/08/2012 - 10:52 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

iMortgage: a completely wired house plus all the Apple crap you can stuff in your pockets!

iTown: a solution to that pesky shadow inventory problem!

Mon, 10/08/2012 - 10:54 | Link to Comment Yen Cross
Yen Cross's picture

Speaking of vender financing. Those China HSBC#'s are a load of crap! 

19:30  CNY   Chinese HSBC Services PMI 54.30   52.00  
Mon, 10/08/2012 - 11:01 | Link to Comment Element
Element's picture

oh god ... not another thread about Apple ... subprime phone loans ...

Mon, 10/08/2012 - 11:43 | Link to Comment franzpick
franzpick's picture

And their new subsidiary:  iREPO.

Mon, 10/08/2012 - 11:00 | Link to Comment Omen IV
Omen IV's picture

presumably they are all reserving upfront for multi-billion dollar credit losses on the receivables

Mon, 10/08/2012 - 11:09 | Link to Comment kridkrid
kridkrid's picture

Somewhere else...

Mon, 10/08/2012 - 11:07 | Link to Comment mr1963
mr1963's picture

I suppose Holder and his merry band of "equal opportunity lending hawks" will be right behind demanding goolge, apple and amazon issue credit to people of a certain color who have no intention of ever paying it back in the interest of "equality." How it's equality when I'm expected to pay it back and they're not, I don't know, but the statistics seem to work in Holder's favor.

Mon, 10/08/2012 - 11:08 | Link to Comment DosZap
DosZap's picture

Apple is single handedly destroying our economy.I would not own an Apple slave prduct if you gave it to me.

Their Suit w/Samsung,has opened a HUGE can of worms that has spread to everything we buy.

Mon, 10/08/2012 - 11:19 | Link to Comment kridkrid
kridkrid's picture

Ummmmm no. Loaning money into existence with interest attached is destroying the economy. Apple makes a bunch of different products some of which were market-changing, most of which were well marketed. I will always view the only two iPhone 5 ads that I've seen as the indication that the company peaked somewhere around the iPhone 4. Earbud design and a slightly larger screen is NOT innovation.

As for the case vs Samsung, protectionism was going to start somewhere. As for slave labor producing shit that we can afford only because of the Ponzi scheme that is the dollar... Same shit, different century... Ending soon, to be replaced with something the same, most likely.

Mon, 10/08/2012 - 11:53 | Link to Comment franzpick
franzpick's picture

Yes, the new iFinance subsidiary will cut the PE to shreds and the stock price back to a 2-digit prefix.

 

Mon, 10/08/2012 - 11:11 | Link to Comment Offthebeach
Offthebeach's picture

Were pretty much renting either actual rent, mortgages that will never be paid to Lord Fedgov and mini-me local Dukesgov, coupled with perpetual revolving commercial credit. So we just live to work to pay rents.
Human farming.
Serfs.
Those that "own" some of the means of their production have hostages to the state. ( ie, middle class, small business, small investios )
Right now Fedgov is feeding the subserfs, and its minor royalty of State/ county/ TBTF/GE...extra.
We live in modern day feudalism.

Anyway, I was hoping E-Bay would get a finance program going so I could rent some boots I have my eye on.( $30 Buy It Now, + ship ) The leaves and brush are falling and revealing cans and returnibles

Mon, 10/08/2012 - 11:26 | Link to Comment DosZap
DosZap's picture

( In Fay Dunaway voice )
It's money...it's credit...it's money.

 

YOU said it!!!

Don't believe Credit IS MONEY, just add a couple of credit cards to your name, and check the BIG 3 Credit agencies, and see the drop in your scores.

Mon, 10/08/2012 - 11:29 | Link to Comment Offthebeach
Offthebeach's picture

Were=we're

Forward Soviets!

Mon, 10/08/2012 - 11:45 | Link to Comment hannah
hannah's picture

the first apple earning meeting that they miss numbers will also be the meeting they announce that they will finance purchases....they have no choice.

Mon, 10/08/2012 - 11:47 | Link to Comment pitz
pitz's picture

Businesses and individuals who *need* or even want credit in this particular environment (with record levels of cash sitting on business balance sheets) are likely to be incredibly poor credit risks.  Of course, Google is no stranger to destroying shareholder value as they have barely even created any during their entire existence. 

Mon, 10/08/2012 - 12:20 | Link to Comment urbanelf
urbanelf's picture

But iPhone's will always go up in price!  Flip that iPhone!  I have a 2nd job as an iPhone dealer!  I own 5 iPhones with no money down!

Mon, 10/08/2012 - 14:40 | Link to Comment Scalaris
Scalaris's picture

First Apple Bank - literally, and maybe after some industry consolidation we'll have MorganApple, or AppleWells.

Plus FaceBook could provide unlimited virtual mortgages, through its subsidiary, Zynga Residential Finance Corp.

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