Apple and Microsoft Aren't as Cash-Dumb as You Think

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:

Company

Return on Assets*

Return on Capital*

Return on Equity*

Apple 20.9% 31.5% 38.8%
Dell (Nasdaq: DELL  ) 7.2% 20.0% 45.5%
Google 13.0% 14.5% 19.2%
Hewlett-Packard (NYSE: HPQ  ) 6.9% 13.2% 21.7%
IBM (NYSE: IBM  ) 11.6% 24.9% 67.5%
Microsoft 18.6% 29.1% 44.0%
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.

Do you agree? Disagree? Kick off the discussion using the comments box below. You can also add all of these companies to your watchlist and get our latest analysis as soon as it's published.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, IBM, and Oracle 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.

The Motley Fool owns shares of Apple, Oracle, International Business Machines, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. 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 (1) | Recommend This Article (6)

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 29, 2011, at 4:30 PM, albo999 wrote:

    IBM has been picking the low-hanging fruit for 10 years. And the CEO has kept a low profile doing it. No need for ego-boosting at Big Blue.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1513520, ~/Articles/ArticleHandler.aspx, 10/24/2014 8:07:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement