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Apple (Nasdaq: AAPL) surprised Wall Street Wednesday when it revealed it was sitting on cash reserves of nearly US$100 billion. Now the question is, what will the company do with it?
Apple's successful product lines, which include the iPhone and iPad, have been gushing bucks for months. That's allowed it to build a sizable war chest.
Eighteen months ago, Apple already had a large sum locked up in cash -- $43 billion -- and some optimistic analysts predicted those reserves would reach $65 billion by the end of 2011. So when Apple disclosed at its quarterly earnings event this week that reserves had ballooned to $98 billion, it raised the eyebrows of both analysts and investors.
Even Apple, which has a history of doing things the way it wants to do them, even when the financial community objects, seems to realize that having a cash reserve that's almost the size of the state budget of California is a problem. It admitted as much when its COO Peter Oppenheimer stated at the earnings session that Apple is "actively" pursuing options for the cash.
Show Us the Money
Large cash reserves are nothing new to Apple.
"Steve Jobs always saw cash reserves as key to being able to have the money for acquisitions, pre-purchasing components for best pricing as well as having reserves in case of any economic downturns or difficult times," Tim Bajarin, president of Creative Strategies, told MacNewsWorld.
"And I suspect that there will always be a large pool of cash reserves in place for this reason," he added.
Investors, though, don't like to see idle money. They like to see money making more money. And if it's not making more money, then they like to see it in their pockets through a dividend check, as Microsoft (Nasdaq: MSFT) started doing in 2003 and Cisco Systems (Nasdaq: CSCO) did last year.
Another way companies with bloated cash coffers calm anxious investors is with stock buybacks. Such a buyback would make sense to Wall Street, where it's believed by some that Apple shares are currently undervalued.
"If you take that cash and you buy back stock, there are fewer outstanding shares so they become more valuable," Scott Testa, a business consultant in Philadelphia, explained to MacNewsWorld. And more valuable shares make investors smile.
No Big Buys In Sight
Apple, of course, could choose to spend the money on acquisitions, as Google (Nasdaq: GOOG), which has a sizable cash reserve of its own, did last year. Some 54 companies were scooped up by the search giant during the first nine months of 2011. That included the $12.5 billion cash purchase of Motorola Mobility (NYSE: MMI).
However, gaudy acquisitions haven't been part of Apple's MO in the past, although it was mentioned in connection with the purchase of the rich telecommunications intellectual property of InterDigital.
It was rumored that InterDigital wanted $3 billion for its IP. That deal appears to be off the table, however, as InterDigital took the "for sale" sign off its IP this week.
"They historically make small- to medium-sized acquisitions," Tessla observed. "I think they're going to continue to do that. I don't see any large blockbuster acquisitions coming from them any time soon."
Supply Chain Magic
Apple's board may be mulling over ways to reward investors with some of the cash it has on-hand, but that won't be where most of the money will be going, maintained The Thematic Investor Chris Versace.
"I would expect the company to continue to use the majority of that cash to further expand its competitive position across all product lines and to expand its bleeding-edge position in the digital lifestyle," he told MacNewsWorld.
One way it can use the cash to advance its competitive potion is by investing it in its supply chain, as it has done in the past. Such investments not only sharpen its competitive edge, but they make in unnecessary to bring cash back into the United States where it will be taxed on arrival.
"If you follow the economics of Apple's business, they get stronger and stronger as they make more and more cash commitments into their supply chain," John Sculley, former Apple CEO and a partner in Sculley Brothers, a private investment firm, told MacNewsWorld.
"It's very difficult for other companies that don't have the cash reserves that Apple has to build a business model that comes anywhere close to Apple's economics," he added.
