3 Non-Acquisitive Uses for Apple's Cash

Why do most of us think that the only three uses for Apple's (Nasdaq: AAPL  ) massive cash balance -- on track to grow to $136.8 billion by the end of fiscal 2013, some say -- are acquisitions, dividends, or share buybacks? CEO Steve Jobs is thinking more creatively than that. As investors, so should we.

Consider iCloud. During Apple's rollout of its buy-once, download-anywhere music service, Jobs talked up the company's new data center in North Carolina. Apple spent $500 million to create a state-of-the-art facility that, according to Business Insider, includes equipment from Teradata (NYSE: TDC  ) , Hewlett-Packard, and NetApp (Nasdaq: NTAP  ) . The new facility implies that Apple is perfectly willing to make huge investments to improve its underlying business.

Bullet the blue-sky research
iFans will tell you that the Mac maker is one of the world's most innovative companies. Surveys say they're right. Apple consistently ranks high on Bloomberg BusinessWeek's list of the most innovative companies, topping the charts from 2005 to 2009. What's interesting is that Apple has earned this reputation while investing comparatively little in research and development.

Apple has spent just 2.4% of revenue on R&D over the past 12 months. By contrast, Google (Nasdaq: GOOG  ) spent 13.4% on research over the same period, while Microsoft (Nasdaq: MSFT  ) committed 13.1% of its top line to R&D. Why isn't Apple spending more on breakthroughs, when it's arguably the world's most vertically integrated company?

I've seen blue-sky research -- the sort of R&D where Big Ideas come first and output comes second -- at work at IBM's (NYSE: IBM  ) Almaden Research Center in Silicon Valley. It's a fantastic outfit where scientists tackle big questions that need answering. Nanotech designs for destroying microscopic superbugs were partially developed at Almaden. Big Thinkers there are also working on redesigning data storage at the atomic level, and creating formulas that could bring clean water to dirty places.

Thinking and spending different
Apple needn't tackle R&D in the same way. But with so much cash, isn't it time the Mac maker's intellectual aspirations matched its design aspirations? Why not use the new spaceship building as an R&D hub aimed at rethinking every element of Apple's value chain? The company could apply its resources toward:

  • Manufacturing innovation. We're not yet at the point where something as complex as a computer can be 3-D printed, but could you imagine the implications of such a breakthrough? Apple has more than enough cash to spend on manufacturing-by-printer. The team also wouldn't face the same pressure as Stratasys (Nasdaq: SSYS  ) and 3-D Systems, since these businesses need incremental product improvements to keep cash flowing. Apple researchers would be free to think in terms of order-of-magnitude improvements.
  • Data storage innovation. IBM is working on this at Almaden, but in many ways, we can credit Apple for moving the computing industry away from magnetic and optical disk drives and toward flash memory. What's next after flash? We don't yet know, but plenty of work remains to bring down the cost per byte of advanced storage technology. We'll also need new form factors, so that tiny devices become capable of storing as much as a server. That way, every node connected to the global cloud -- where a 'node' is a phone, a PC, a tablet, or some other device we've yet to conceive of -- has equal deftness for downloading, manipulating, and uploading data.
  • Microprocessor innovation. Apple has already broken ground in this area with its A4 processor, created by the team led by former IBMer Mark Papermaster and acquired with P.A. Semi in 2008. Yet A4 remains an incremental improvement, bound by Moore's Law. What about working on designs unbound by the current thinking? What about 100- or even 1,000-core chips built to function inside a mobile device? Impossible, you say? We'll never know unless someone tries. As a hardware supplier whose fortunes are increasingly tied to the success of its mobile products, Apple has ample incentive to work on this breakthrough.

The Foolish bottom line
Right now, Apple mostly innovates with regard to execution. Rather than invent entirely new technologies, the iEmpire improves what exists, and packages whole products that, for the most part, meet Jobs' credo to sell gear that "just works." The Mac maker need not change this mantra in order to deliver outstanding returns to today's investors.

But there will come a day when incrementalism no longer suffices. Apple has the cash to build one of the world's great R&D laboratories, worthy of legend. Why not do it? Why not lead rather than follow, especially now when a shift to cloud computing is remaking the entire computing industry? Let me know what you think using the comments box below.

Of course, Apple isn't the only company looking to profit from the rise of web-based computing. Take a minute to watch this free video right now, and you'll walk away with a stock idea from our Motley Fool Rule Breakers scorecard, and a richer understanding of how the Web is changing everything.

The Motley Fool owns shares of Google, Microsoft, International Business Machines, 3-D Systems, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, Stratasys, Teradata, and Apple, and creating a bull call spread position in Apple and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (8)

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 June 15, 2011, at 4:10 PM, rfaramir wrote:

    Good thinking.

    I still want a dividend :-)

  • Report this Comment On June 15, 2011, at 6:26 PM, ConstableOdo wrote:

    To hell with the dividend as long as Apple goes to $500 a share sometime the middle of next year. Heck, I'll even settle for $420 by end end of this year.

  • Report this Comment On June 15, 2011, at 9:27 PM, weiwentg wrote:

    Even if Apple goes to $500 a share and ploughs half their spare cash flow into innovation, they can and should pay a dividend. I will be voting against the entire slate of directors, every year, for as long as I hold the shares and they don't pay a dividend.

  • Report this Comment On June 15, 2011, at 10:41 PM, techy46 wrote:

    Apple's cash should be used to reward their investors by buying back stock, paying dividends and maintaining leadership in consumer space. Since they're really consumer oriented it wouldn't be feasible to compete in the enterprise space with Microsoft, Oracle and SAP.Technical innovation usually doesn't come from consumer technology enterprises. It comes from the likes of AT&T, GE, IBM and Intel.

  • Report this Comment On June 16, 2011, at 2:57 AM, jameskatt wrote:

    Stock buybacks and dividends only weaken the value of Apple's stock and Apple's ability to compete shaker other companies.

    Apple does a fantastic job with managing it's money. Its cash hoard is part of its stock's value. Its cash is a huge competitive weapon allowing it to spend more than anyone on bulk supplies of components. In fact, Apple will spend 40 billion next year alone on components to make its products. It needs a huge hoard of cash to do this.

    Apple spends less on R&D because it actually has fewer employees that do R&D than it's competitors. Also, Steve's mantra is that real artists ship product. Thus pie in the sky wasteful projects are shut out. Just look at how much Microsoft wastes in such research.

  • Report this Comment On June 16, 2011, at 3:01 AM, jameskatt wrote:

    Note that Apple has much smaller teams that develop products than other companies. It has much less bureaucracy and layers of management as a result. This makes Apple's R&D amazingly efficient and cost effective. As Steve said, Apple is the world's biggest startup company. And it is its own venture capitalist. The cash hoard acts like Apple's own bank.

  • Report this Comment On June 16, 2011, at 5:51 AM, pstonebridge wrote:

    I think the author is missing the reason that Apple is so successful. It let's other people break the technological barriers and instead finds ingenious and attractive ways to package the leading edge (not the bleeding edge) technologies together into powerful tools for to benefit everyday people in everyday life. Combine that with the coolest packaging and the smartest business alliances and you've got Apple.

    I hope Apple never turns into some over-spending research organization. Then I'll have to sell my shares even if it is paying a dividend.

  • Report this Comment On June 18, 2011, at 11:59 AM, tomshiff wrote:

    There are many products Apple could innovate on that would be successful now and going forward. Learning devices for kids, hearings aids, pacemakers, voice activated devices, home controller systems, all products that may not have the same penetration as what they have put out so far, but with technical innovation, would change the market for what is currently out there.

  • Report this Comment On July 05, 2011, at 3:28 PM, Fool wrote:

    Great article -- love the out-of-the-box thinking!

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