September 26, 2023

DealBook: A Shopping List for Apple’s Growing War Chest

Christof Stache/Agence France-Presse — Getty Images

“Excessive,” “untenable,” simply “ridiculous” — those are some of the words analysts are using to describe Apple’s gigantic cash pile.

It’s certainly a hefty one.

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.

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.

“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.”

Shares of Apple were trading up 2.7 percent, at $351.50, on Thursday afternoon. So far this year, the stock is up 9 percent.

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.

“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.

If and when Apple decides to spend, it is unclear what the company might do with the money. Apple could pursue a major share buyback, issue dividends (it currently does not pay any), or it could make acquisitions. Last October, Steve Jobs, chief executive of Apple, said it might pursue “one or more very strategic opportunities.” But a large deal would represent a notable shift in Apple’s strategy of acquiring small companies (largely for talent or pieces of technology) in tuck-in deals.

Last year, the company only made a handful of takeovers, acquiring an iPhone application, Siri, and a small chip maker, Intrinsity. Its largest acquisition in 2010 was Quattro, a mobile ad company it purchased for close to $300 million. If Apple hopes to put a meaningful dent in its current war chest, it will have make a big purchase or embark on an uncharacteristic shopping spree.

“There is no history of Apple buying companies that have a full suite of products, and in large part, that reflects Apple’s reticence to take on the risk of integrating new companies and new cultures,” Mr. Reiner said.

If Apple does make a major acquisition in the near term, it could involve a content company, according to three analysts interviewed. As the value of Apple’s hardware products become increasingly tied to the content and applications available on those devices, the company will become more interested in content providers, they said.

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 device, could compliment Apple’s iTunes service, which hosts thousands of movies and videos, according to James Cordwell, an Atlantic Equities analyst.

“Because Apple needs to provide a consistent service, it needs more Internet-based services, whether it’s video, music or applications,” he said. “Netflix would be a fantastic business for them to buy, it gives them a great consumer business and a recommendation engine that would help the other parts of their business.”

According to Mr. Cordwell, any bid for Netflix would probably come at a premium and may be as high as nearly $20 billion — still a fraction of Apple’s reserves. Netflix’s current market capitalization is about $13.2 billion.

As of December of last year, about 60 percent of Apple’s cash sat in offshore accounts.

Brian Marshall, an analyst with Gleacher Company, said a Netflix takeover was possible. But it may not be as attractive for Apple, since Netflix does not own the streaming rights for the majority of its content.

Instead, Mr. Marshall said Apple could go after the pipelines, by acquiring a company like Akamai Technologies. Akamai’s content delivery service helps businesses like Apple stream content and applications through its sprawling network of servers. “It would give them better utilization of their network technology and the flexibility to operate the networks as they see fit,” he said. Akamai’s market capitalization is $7.6 billion.

The analysts interviewed said an acquisition of Facebook remained a remote possibility. Although Mr. Jobs has expressed interest in social networks, recently launching Ping (a music-centric community), this may be one of the few takeovers that would be too difficult to swallow, even for Apple. Facebook, which recently raised $1.5 billion in a financing round led by Goldman Sachs at a $50 billion valuation, continues to trade higher on the secondary markets, with recent trades putting its valuation north of $70 billion.

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