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3 Ways to Improve Apple

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Not many of you care that Apple (Nasdaq: AAPL  ) is hoarding roughly $40 billion in cash and investments. You say you don't want or need a dividend.

Your argument -- a good one, I think -- is that management has proven itself capable of delivering strong returns for shareholders. Why should any of us think we're smarter than Apple CEO Steve Jobs?

Playing the value game
"Perhaps there isn't strong enough value in the acquisitions they are looking at right now?" wrote Fool Turfscape in a comment to my last story about Apple's cash position.

He further points out that Warren Buffett's Berkshire Hathaway held $40 billion for years before deciding to buy shares of General Electric (NYSE: GE  ) and Goldman Sachs (NYSE: GS  ) , and snap up Burlington Northern Santa Fe outright in a $44 billion deal.

Turfscape's test is simple: "Do the acquisitions make sense, and are they a good value? If not, sit on that hoard."

Apple would do well to heed this advice in normal times, but these aren't normal times. Jobs' comments about Google (Nasdaq: GOOG  ) and Adobe (Nasdaq: ADBE  ) suggest the Mac maker is preparing to fight a two-front war that seemed unimaginable a year ago.

And that changes everything.

Now's the time to stockpile weapons
According to Wired, in a "Town Hall" meeting with employees, Jobs expressed disdain for the Nexus One, calling it Google's attempt to kill the iPhone. He also allegedly expressed doubt about the veracity of The Big G's "Don't Be Evil" slogan.

Jobs also attacked Adobe, calling the company lazy, and accusing it of forgoing opportunities to do interesting work, Wired reports. He referred to the company's Flash technology as "buggy," Wired's sources said. (He may be right.)

Fighting words like these make clear that there's a war coming, and from it one premier take-anywhere platform for manipulating, delivering, and consuming content will emerge. Almost everyone has a stake, but Apple and Google have more to lose. (Note: A mockup of a Google alternative to the iPad made its way to the Web as this story was being filed.)

Adobe, meanwhile, has some of the best-known, most-used tools for creating and viewing content, including Photoshop, AIR, Adobe Reader, and, of course, Flash.

Apple leads because its engineers excel at hardware design, and it's hardware that makes digital delivery pleasing or cumbersome. Acquisitions should be aimed at enhancing Apple's capabilities in this area.

1. The solid state of Apple
Aside from the drive makers themselves, few companies have taken to solid-state drives (SSD) faster than Apple has. And for good reason: SSD technology is typically lighter, consumes less power, is faster, and more durable.

There aren't many places to save power if you're designing hardware. The chipset is one. The drive is another. Apple has already redesigned chips with technology acquired from PA Semi. Wouldn't it make sense for Apple to buy an SSD supplier next?

I like STEC (Nasdaq: STEC  ) . The company has already shown an ability to make very small SSDs as proficiently as it does large network drives. Plus, the stock trades for just eight times forward earnings.

2. Batteries should be included
When Jobs unveiled the iPad last week, he spent ample time discussing the device's 10 hours of battery life. Low power consumption surely has a lot to do with this. But Apple could do better. It could reinvent the battery, or acquire the technology required to do so.

Picking a candidate here isn't easy. A123 Systems is more focused on the automotive industry than it is consumer electronics. The good news? There are at least a dozen worthy start-ups trying to reinvent power delivery, including Boston-Power and SEEO, which is creating a solid-state battery.

3. How about a place for all that data?
Finally, let's talk data. If Jobs' strategy for the iPad is to have it be a window to the world's greatest content, then Apple needs a bulletproof mechanism for delivering bits.

Jobs isn't likely to trust an outside vendor for this task, not even Akamai (Nasdaq: AKAM  ) , which has been a partner for years. Instead, Apple is going to have to build or acquire data centers similar to the one now under construction in North Carolina. Or, better still, Apple could just acquire Akamai outright.

Those are my ideas. Think I'm wrong? Have other ideas for Apple acquisitions? Let's hear 'em. Make your voice heard using the comments box below.

Adobe, Apple, and Berkshire Hathaway are Motley Fool Stock Advisor selections. Berkshire is also a Motley Fool Inside Value pick. Akamai and Google are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and stock positions in Akamai, Berkshire Hathaway, and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Berkshire Hathaway and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy could be this year's lucky winner.

Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2010, at 2:28 PM, Turfscape wrote:

    I think a drive maker would make for an interesting acquisition. STEC has decent enough financials that it doesn't (on the surface) seem like a risky buy. But, what's the state of their R&D? What's the point of acquiring a drive maker if it doesn't hold the promise of next-generation drives? I'm not claiming that STEC doesn't have the capacity for next-gen...I really don't know where they stand. I don't see simply acquiring STEC as a major boon to the bottom line, though, for Apple unless it holds the promise of new, proprietary tech.

    Now, batteries could make for an interesting investment. I like to think that a battery designed and developed along side the hardware it supports would lead to greatly improved performance...but is battery development too far outside Apple's core business (no pun intended) to make financial sense? A battery is a fairly specialized item, and if the focus becomes solely batteries for Apple devices, will there be enough ROI if it's a division of Apple instead of a supplier to Apple?

  • Report this Comment On February 03, 2010, at 7:35 PM, JJMSpartan wrote:

    Excellent commentary Tim. Apple has definitely picked up the pace of acquisitions in recent months, so this might fit in perfectly. Apple recently has purchased:

    + LaLa Media - a company with technology aimed at sharing music across the net - a possible iTunes tie-in

    + Quattro Wireless - one of the leading firms in delivering ads to mobile devices

    That big war chest is starting to get cracked open, and as always, Apple's acquisitions seem to tie directly into their future technology (anyone doubting the purchases of Fingerworks and PA Semi now?)

    The ideas you have are good ones - specifically the battery one. As a tie-in to that, how about a solar tech company? If your iPhone / iPod / iPad were able to charge up even a little by just sitting in the light, it would make for a natural progression of features on their devices.

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