In at least one area, Microsoft (Nasdaq: MSFT ) is on par with Apple (Nasdaq: AAPL ) and smokes Google (Nasdaq: GOOG ) . Mr. Softy and Mr. Mac are two of the best investors in the tech universe. But don't take my word for it. Have a look at the data:
Return on Assets*
Return on Capital*
Return on Equity*
|Dell (Nasdaq: DELL )||7.2%||20.0%||45.5%|
|Hewlett-Packard (NYSE: HPQ )||6.9%||13.2%||21.7%|
|IBM (NYSE: IBM )||11.6%||24.9%||67.5%|
|Oracle (Nasdaq: ORCL )||11.8%||15.6%||24.1%|
Source: Capital IQ, a division of Standard & Poor's. *For the trailing 12 months.
Fools will argue, rightly, that agreeing to spend $8.5 billion on Skype is evidence Microsoft's massive cash hoard -- roughly $50 billion as of this writing -- makes it stupid. Recent declines in Microsoft's returns on capital speak to this assertion.
But if Mr. Softy is beginning to show signs of getting fat and stupid, Google has a long history of poor capital allocation decisions when compared to its two primary tech industry peers. (Returns on capital have declined every year since 2006.)
Of course, the Big G isn't alone in producing comparatively small returns. Neither Dell nor Hewlett-Packard nor Oracle gets close to the numbers Apple and Microsoft are putting up.
IBM is in the ballpark with a 24.9% return on capital, but it's Apple that tops the list. Surprised? You should be. The Mac maker earns so little on its outstanding cash that it's tough to believe it's the best capital allocator among the tech industry elite.
Small bets, big returns
Or is it? Apple's well-known appetite for small acquisitions may be unleashing huge value. Consider P.A. Semi. Having the A4 chip built from the PWR architecture it acquired is helping to juice big sales of the iOS devices the chip powers, including the iPhone and iPad.
You'd think Microsoft would appreciate this dynamic since Mr. Softy knows big returns often come in very small packages. Back in 2007, CEO Steve Ballmer orchestrated a deal whereby $240 million bought Microsoft a 1.6% stake in Facebook -- an investment that's worth (wait for it) roughly $1.12 billion as of this writing, a four-bagger. And that's just today. Microsoft sees even greater returns if the social network debuts next year at a $100 billion valuation. The lesson? Small, strategic bets may offer more than monster buyouts.
A golf clap for Mr. Mac
For all the hand-wringing over its cash balance, perhaps it's time to admit that Apple CEO Steve Jobs knows exactly what he's doing. And maybe the other Steve -- (cough) Ballmer (cough) -- ought to revisit history and look for more small and strategic bets like Facebook was back in 2007.
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