Thursday, July 21, 2011

Apple's Pile of Cash

Apple reported earnings this week, and the balance sheets shows an enormous amount of cash:  $76 billion!   For the first time, we are beginning to hear more investors clamor for clarity about what will happen with this cash.  Some even would like to see some cash returned to shareholders.  In the Wall Street Journal today, we see a quote from one investor: "If they can't find ways to use it to grow, they should be returning it to shareholders," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns Apple stock. 


On the other hand, some investors don't mind Apple's financial strategy at all: "It provides me enormous comfort that their balance sheet is so strong," said Mike Binger, a fund manager at Thrivent Asset Management, which owns Apple stocks. As far as he is concerned, "They have the flexibility to do whatever they want with it."

I am astounded by the amount of cash on the balance sheet.  Normally, I worry about firms that have this amount of cash.  I don't want them squandering the cash on flawed acquisitions or poor diversification strategies.  The question, though, is whether Apple deserves more of a benefit of the doubt, given their tremendous track record, coupled with the fact that they are still growing very rapidly.    To me, we should worry most about a cash pile like this when we have:

1. Slowing growth at the firm's core business
2. A history at the firm of flawed diversification or acquisition strategies.
3. Poor corporate governance practices at the firm
4. A lack of opportunities for productive R&D investments

To me, Apple does not raise concerns on these four points.   However, the situation bears watching as the pile of cash continues to grow at an incredible pace.

19 comments:

Luke Bornheimer said...

Whether its an official source or not, there is a great post on Quora about what Apple should do (or currently is doing) with its $76.2B in cash reserves. The poster describes that Apple could be using the cash to leverage new component exclusivity and advantages that give it a heads-start in new markets/products. For example, the iPad was *well* ahead of the competition for almost a year; Not because it made a brand new product (tablets have existed for years), but because it had a component advantage.

You can find the post at http://www.quora.com/What-would-be-a-good-use-of-Apples-76-2+-billion-in-cash/answers/612608?srid=CkS.

It's well worth the read.

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