Apple’s massive $66 billion war chest; what’s it for?

“In its latest earnings report on Wednesday, Apple recorded cash and cash equivalents of $65.8 billion, adding to the prior quarter by about $6 billion. The sum easily trumps Apple’s peers. Google, which boasts the second-largest cash pile, reported $36.7 billion in cash last week, less than half of Apple’s war chest [sic],” Evelyn M. Rusli reports for The New York Times.

“And the Apple machine, supported by the fierce popularity of its iPhone and iPad products, shows no signs of slowing down. Revenue rose 83 percent, to $24.67 billion, in the last quarter. But as it grows, analysts say, at some point Apple will have to crack the piggy bank — and maybe go shopping,” Rusli reports. “‘It’s going to become truly untenable,’ said Yair Reiner, an analyst with Oppenheimer & Company. ‘Two years ago, I would say its cash pile would be untenable at $50 billion, and now we’re at $70 billion. At some point something will need to get done.'”

“As long as Apple can maintain its trajectory, analysts say, it will be difficult for shareholders to complain about excess cash. But the pressure is mounting. Apple is trading at a discount to the broader Standard & Poor’s 500-stock index, according to Mr. Reiner’s calculations. The average company in the S.&P. trades at 13 times 2012 estimated earnings. If you subtract cash from Apple’s price, it is trading at about nine times 2012 earnings, he said,” Rusli reports. “‘Now that Apple is trading at a discount to the overall market, it’s easier to argue that Apple is being penalized for holding onto its cash,’ Mr. Reiner said.”

Rusli reports, “If and when Apple decides to spend, it is unclear what the company might do with the money… One possible target is Netflix, a movie rental service that streams content to users’ personal electronic devices. The service, which is also available on Apple’s iTV [sic] device, could compliment [sic] Apple’s iTunes service, which hosts thousands of movies and videos, according to James Cordwell, an Atlantic Equities analyst… The analysts interviewed said an acquisition of Facebook remained a remote possibility.”

Read more in the full article here.

94 Comments

  1. That doesn’t make any sense. He’s arguing that Apple is worth 9 times earnings with the cash, which should be a buying signal for investors, but wants them to get rid of the cash, effectively pushing their P/E higher and thus less of a buying signal for investors.

    And forget about AAPL buying NFLX. Their stock price is massively inflated right now (thus their market cap). Currently trading at over 80x earnings (kind of insane) there’s no way AAPL forks over that kind of cash outright to buy a company they could easily compete with by investing their own capital as opposed to outright purchase.

    1. And from what I hear Netflix’s contracts with the movie companies have clauses stipulating that if Netflix gets bought the streaming rights do not extend to the new company.

      So definitely not an acquisition of Netflix, if true. And even if not true, probably not likely.

      Also, isn’t it so that Netflix’s best streaming deals run out later this year or early next? They’ll be renegotiating soon. Their costs most certainly will increase when that happens.

      1. That’s the key – content! Anyone can duplicate Netflix if they have the licenses to distribute the content. What would Apple actually be buying if the contracts did not carry over? Not much at all…

        1. That’s what I would like to see. Imagine if Apple bought the rights to a show (or several shows) and the only way to watch them was from an iOS device? (Apple TV, iPhone, iPad, iPod Touch). It could probably be available through iTunes as well for people to watch on their computers but if they get enough exclusive content I would imagine Apple TV sales would increase.

    2. Your assumption is baed on getting rid of the cash with no return on the investment.

      But I agree about Netflix. Forget it. Other than actually receive DVD’s in the mail, AppleTV is better.

  2. I’ve heard this sort of thing so many times before, yet all I see is a sweet position where Apple can relax and innovate as it wishes, without having to fret about the wherewithal.

    And if things ever do go nuts-up, I know from personal experience, then that’s when money in the bank really, really counts.

      1. Buying Gold from companies like Goldline are a scam. It doesn’t matter gold has jumped hundreds of dollars per ounce.

        I just know it’s a scam because Weiner told me so. Anthony Weiner.

        Weiner.

      1. And, in one year from now the same NYT will ask: Apple’s massive $95 billion war chest; what’s it for?

        Then, in 2013: Apple’s massive $135 billion war chest; what’s it for?

        Then, in 2014: Apple’s massive $180 billion war chest; what’s it for?

        Then, in 2015: Apple’s massive $230 billion war chest; what’s it for?

        (Then Apple buys MS. ;))))))))))

    1. What a monumental waste of money that would be! Microsoft’s incompetent management is slowly running the company into the ground. No need for assistance from anyone else.

    2. Don’t buy MS.. Remember in the 90’s when Apple was ready to fold; just before Steve came on board? MS invested in Apple and it was because they were in massive federal lawsuits in this country and others regarding their monopoly status. Apple was the only OS around that was commercial. Without Apple it would have really soured their hand. Apple was needed but absolutely no threat. Buy out MS (not practical of course but still) and suddenly Apple is the only game in town. And I know it’s still not monopoly status but the cry will be made.

  3. The service, which is also available on Apple’s iTV [sic] device, could compliment Apple’s iTunes service…

    Unless they program Netflix to play a clip of Billy Crystal saying “You look mahvelous!” every time you launch iTunes, I’m pretty sure it would complement it, not compliment it.

        1. What happened to taking pride in one’s grammar, sentence structure and spelling? If all these failings don’t prove how sloppy our educational system (and absent parenting) are ruining our country – what does? Hah?

        2. I don’t often point out spelling or grammatical errors, although they are rampant on sites like this, but I do enjoy pointing out grammatical errors in posts pointing out grammatical errors. (I even dislike it when I make my own spelling and grammatical errors.)

          The word system is singular.

          The word systems is plural.

          Therefore, it should be “… our education system is ruining our country…”

          Peace! 🙂

        3. That’s my top spelling pet peeve. Saw someone in another forum just this morning berating another commenter for their education, and while doing so, spelled it ‘loose’.

          So, I say the prayer…..

          Dear Lord,
          Please grant me the ability to punch people over standard TCP/IP.
          Amen.

  4. Well, about $38B of that amount is sitting in Apple’s foreign subsidiaries. If they were to bring it back to the US in order to buy some US-based company, Apple would have to pay the balance of the US corporate tax of 35%. That’s not going to happen any time soon as long as corporate tax reform is in the air, holding out the carrot that corporate tax rates may drop.

    So, the result is that Apple really has about $28B in cash in the US that could be used to buy something.

    Of course, Yair Reiner, of Oppenheimer, knew that, since he’s a professional analyst who is paid to read Apple’s 10K and 10Qs.

    1. Unfortunately for us, corporate taxes and purchases do not work like our taxes and purchases but with bigger numbers. Only the last sentence of your post bears any relationship with reality.

  5. Unrelated to this topic question:

    Apple announced that iPad 2 will launch in 13 more countries next week. anyone knows what these countries are? I can’t seem to find it on internet

    1. I heard from some analist the iPad2 will be launched next week in Afghanistan, Cuba, North Korea, Iran, Libya, Syria, Greenland, Birma, The Vatican, Liberia, Côte d’Ivoire, Zimbabwe and Haiti.
      Must be true.

        1. Actually, Greenland will receive a special version, the iCeberg. Available only in white, the iCeberg must be kept in a frozen state and will cost a cool $400. A bottle of frozen vodka is available as a drink-to-order option.

          There. I feel better now.

        2. Yes sorry about Burma. I’m not a native speaker of English.
          Very good you found the odd one out – Greenland. It’s neither a country nor green 🙂

        3. Not really. Hilarious is not what comes to mind. More along the lines of mean, poor taste, immature and inaccurate (e.g., Vatican is not governed by political body). If you are making a joke, make an original one.

          Still, if someone (post high school level please) here could answer my question on countries, that would be great.

        4. listen buddy, wingsy made a well timed, sufficiently subtle, funny comment. the fact that you did not “get it” should not bother you so much. nobody cares about your country question.

        5. Oh the irony Alex; you’re “pontificating”.

          Anyway FYI the Vatican city is ruled by a political body!

          In fact –

          The Politics of Vatican City takes place in a framework of an absolute theocratic monarchy, in which the head of the Catholic Church, the Pope, exercises ex officio supreme legislative, executive, and judicial power over the State of the Vatican City (an entity distinct from the Holy See), a rare case of non-hereditary monarchy.

          The government of Vatican City has a unique structure. The Pope is the sovereign of the state. Legislative authority is vested in the Pontifical Commission for Vatican City State, a body of cardinals appointed by the Pope for five-year periods. Executive power is in the hands of the President of that commission, assisted by the General Secretary and Deputy General Secretary. The state’s foreign relations are entrusted to the Holy See’s Secretariat of State and diplomatic service. Nevertheless, the pope has full and absolute executive, legislative and judicial power over Vatican City. He is currently the only absolute monarch in Europe.

          [stolen from the good people at Wiki]

          That’s a part of your Easter lesson done n’ dusted.

          If you are making a comment, make a cogent one.

  6. What’s 70 Billion in cash when all the good companies have market caps of 30-180 Billion?

    What? You want them to buy the Bob’s Car Wash Chain for 1 M? You want them to get in heavy with my cousin Fred’s awesome new twist on Twitter? RIdiculous.

    Apple are so efficient and flush with talent in all the areas that they need it, that if they are even going to think about buying someone it will be a company that provides the “essential technologies” that Apple needs, but don’t yet have expertise in. Serious players with serious value.

    Perhaps telecommunications. Perhaps a cable operator. Perhaps Facebook.

    Maybe they want to put together a satellite based wireless network.

    What I’m most sure they have already bought with all that cash is freedom. Freedom to do what they want when they want. Freedom to do tomorrow what tomorrow requires, even if today it’s not yet clear.

  7. As the article notes, “As of December of last year, about 60 percent of Apple’s cash sat in offshore accounts.” That comes to about $40 Billion. Any buyback or dividend sizable enough to make a dent in Apple’s cash pile would likely require repatriating much of that money, which then makes it subject to federal income taxes. So don’t expect either.

    Let’s face it. Lots of people are very foolish with their own money, even more so with other people’s money. (Think “government”.) So the very notion that Apple has that much money sends them into fantasy land. “Buy Adobe… or Sony… or Netflix… or Dell… or Microsoft (and shut it down of course)” Facebook? Give me a break! Obviously those making such suggestions have never understood the concept of “return on investment”.

    1. Tim Cook put it clearly during the last conference call. They use the cash for strategic investment, like buy up all touch screens, flash memories etc. with their off shore cash.

  8. Pour stores and advertising into major China cities…the hugest volume of capitalistic youth market purchasers in the world…they don’t have money to buy cars, but they DO have money to buy smartphones and computers. They are high tech and want to beat Japan and South Korea. Even small cities in China average a million people.

  9. Some humble ideas:
    1) Invest more in a cloud infrastructure, substantially more to what was already invested in NC facilities. Make all cloud services free and support them with ads
    1.1 Launch online iTunes version with all existing features available online, plus music streaming (pandora model), plus make some videos available for free supported by ads (hulu model) + enable submissions of users generated content (youtube model). Consider acquiring pandora and shazam
    1.2 Launch social network platform
    1.3 Develop online versions of iWork suite
    1.4 Online

    2) Selectively buy content and make it exclusive to iTunes only, like important iconic collections of movies, shows, documentaries, etc. Same thing for iBook store.

    3) Develop widows version of iWork – make it a standard

    4) Develop an alternative to PDF, make it a standard and use it for all content sold in iBooks.

    5) Create an agency to enable artists generate content with Apple directly, bypassing labels.

    6) Create an alternative to Ticketmaster.com and integrated with itunes’ ecosystem and genius recommendation system

    1. Oh God!
      The last thing the world needs is more ads.
      Don’t you realise that free is never free.
      You pay for all the ads out there, in all the things you buy.
      It’s unavoidable.
      Legalised pickpocketing.

  10. It wouldn’t cost anything like $66 billion to do it, but I’d love to see Apple get serious about the enterprise server market. They could produce systems vastly superior to IBM’s mainframes and Oracle’s aging SPARC machines.

    -jcr

  11. No, not Netflix. Apple can simply outcompete them with iTunes and Apple TV, rather than spending a bunch of money to acquire them.

    Maybe Amazon? When the Kindle machine starts tanking.

  12. They should create a campus university called the Michael Dell School of Business. Graduates should then be directed to apply for IT management positions working for large corporations in Seattle.

  13. Just buy Google, sack all the top executives, take over all the intellectual properties and excess cash of Google and give it back to Apple shareholders. Then shut down the “do no evil” Google.

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