Apple Corporate Credit Rating Lags Behind Microsoft and Oracle

This release from Fitch probably flies right in the face of what many investors may have assumed. With a cash arsenal of well over $100 billion and with low spending metrics for returning capital to shareholders, many investors might have just assumed that Apple would be as close to a “AAA” rating as a company could get. That is not the case, but what is surprising is that Apple would not be consistent with a “AA” rating.

Fitch said:

Inherent business risk that overshadows a significant liquidity cushion when evaluating long-term credit ratings for consumer-centric hardware companies generally leads us to assign these companies a Long-Term Issuer Default Rating at or below the “A’ category. This reflects the volatility in consumer preferences, significant competition that accelerates product commoditization, and rapid evolution of technology.

Fitch went on to say that consumer product companies such as Sony Corp. (NYSE: SNE), Nokia Corp. (NYSE: NOK) and Motorola Mobility have proven the risks related to ever-changing consumer tastes, low switching costs and a highly competitive environment. The firm also noted that each of those others has historically had a dominant market position and strong financial metrics, only to falter over a relatively short period of time. The report says, “Apple’s better diversification and the stickiness of its iTunes ecosystem clearly make it a stronger credit that would likely be at the highest end of the ‘A’ category.”

What is interesting here is that this rates Apple at a theoretically lower rating than Microsoft Corp. (NASDAQ: MSFT), with a Stable Outlook and with a “AA+” rating, and Oracle Corp. (NASDAQ: ORCL), with an “A+” rating. Fitch showed that all three of these companies benefit from substantial recurring revenue from enterprise software and/or long-term IT services contracts, which typically carry high switching costs.

Here is what it said about the long-term outlook and rationale beyond the hype and favor of today:

Fitch’s ratings ultimately hinge on the volatility of a business model, since the typical bond investment period can extend beyond several product cycles, while also considering financial metrics and liquidity. For ratings in the “AA” category, we would insist on higher visibility and a longer time horizon regarding the sustainability of a company’s business model.

Apple shares are unlikely to move handily from this news. That being said, it will seem counterintuitive to many investors that Microsoft and Oracle would be higher rated than Apple. Apple shares are up 1.6% at $424.00 in early Monday trading.

FULL FITCH NOTE