How Microsoft Is Putting Its Cash to Work

Apple (AAPL -0.57%) rolls out new versions of the iPhone, iPad, and Apple Watch. Microsoft (MSFT -1.84%) hikes its dividend and announces a $60 billion stock buyback plan. In this episode of MarketFoolery, Tim Beyers analyzes those stories and shares why, despite the fact it generates good cash flow, he's not a huge fan of McAfee's (MCFE) business.

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This video was recorded on September 15, 2021.

Chris Hill: It's Wednesday, September 15th. Welcome to MarketFoolery. I'm Chris Hill, with me today, our man in Colorado, Tim Beyers. Thanks for being here.

Tim Beyers: Thanks for having me, man. It's good to see you.

Hill: Good to see you. We've got an overlooked cybersecurity stock, we have an enormous pile of money being deployed by a tech giant, but we're going to start with yesterday's infomercial from Cupertino. Apple's CEO, Tim Cook, and several other executives took to the stage to unveil the latest versions of the iPhone as well as a new iPad, the latest version to the Apple Watch, which will all be coming later this fall. You and I were talking before we started recording here. Look, there are some legitimately good and improved features to talk about, but the overall feeling of the event was like they were really trying to sell this. I suppose I would do it if I were them, but boy, they were really trying to put on a show.

Beyers: I couldn't tell for sure, Chris, but was Tim Cook wearing a black turtleneck and jeans? Because he sure sounded a lot like Steve Jobs.

Hill: He was pretty animated.

Beyers: He was pretty animated. Here's the thing that's very interesting to me. It did feel a little bit like Apple was trying to make excuses for not coming out with a lot of new product, and yet, it's interesting to me that what they lead with, Chris, is the new product which has been more recently, it has been services, and the lead off was Apple TV+, like, look at all the amazing content we're making and you know what that is legit because there is a lot of great content that's coming through here. Love him or hate him, but Jon Stewart coming back on Sept. 30, I think that's amazing. Season 2 of Ted Lasso has been unbelievable. I thought season 1 was great, season 2 has been just as good. I do think there's stuff to celebrate here. But like you said, Chris, the tone was, "we apologize that this isn't as amazing as you want it to be," which feels weird.

Hill: It does feel weird, because I don't know that there were expectations for that. This is something we talked about the other day on the show. The life cycle for Apple is like, oh, yeah, it's time for an incremental upgrade event. That's what this was. Although to your point about the content on Apple TV, that plus the Watch, nice reminders to never bet against a large company with seemingly limitless piles of cash. Because if you go back to the original event where they unveiled the Apple Watch, there was some head-scratching, there was a little bit of, like, "is this all right now?" and it was like the very first iPhone, which is different as it was from other mobile phones at the time, you couldn't connect to the internet with it and the company just continued to improve it over time. When they came out with Apple TV, it was like, I guess they are going to try this, they can certainly, they have the cash to spend on content. The early stuff doesn't look amazing, but they are committed to it, and so they're going to keep going with it and as you said, more things in the pipeline. But let's get to the devices because I'm not really a gadget person. But it seems like, among other things, the longer battery life, was Apple saying to its customers, we hear what you're saying and here's improved battery life.

Beyers: Absolutely. I don't have the specific numbers here, but it was roughly 1.5 hours on every single device. Another 1.5 hours we're giving you, another 1.5 hours. You were hearing that repeatedly across the iPhone line, so we had the iPhone 13, from Mini all the way up to Max. I do like, by the way, that they've normalized the names a little bit there. They're still using, and I still use an iPhone SE, but it does make more sense from the naming conventions to go for mini all the way up to max. There aren't a lot of big changes in the iPhone, but the cameras are better and what do we like about our iPhones? We love that they're our default camera and we do love to use them for all of the hours that we're awake. So longer battery life makes a huge difference, because this is the default device. In that sense, it wasn't a barnburner in terms of new features for the iPhone. But to your point, Chris, they are essential features. These are the key things that we love about the iPhone, so making them better is a smart thing to do.

Hill: It also enables them to keep the price point where they want to keep it, where they have kept it for such a long time, defying not only expectations, but history in terms of consumer technology because forever the price of consumer technology got less and less expensive. Yes, these are incremental upgrades, but they are upgrades that enable Apple to keep charging a lot of money for people who want the top of the line, in this case, the iPhone 13 Pro Max.

Beyers: Yes, absolutely. The pricing stays the same. There are small decreases on the existing lines. You can still buy the iPhone SE, that's now at $399. You can buy the 11, you can buy the 12. Apple's going to keep a vibrant group of iPhones that it can sell and it's going to do the same thing for all of its product lines. I want to quickly hit on the Apple Watch here, Chris, because this is one that I think maybe got a little bit of shade for lack of a better term, because it didn't really look like anything new and the way that Apple positioned it, maybe it's not silly, maybe there's something to it. But when you say, this is the most rugged Apple Watch we've ever made, oh I'm sorry, not the most rugged, the most durable, then it makes it sounds like, are you selling light beer, what is this? But having said that, the design is a little bit bigger, it is a little bit more elegant. It does have a little bit more screen space. As is always the case, if you've committed to the Apple Watch and you're on, let's say, the fifth generation, you might be willing to go to the seventh generation, so it's interesting. I thought this was maybe the weakest of the things that I saw, whereas the iPad Mini I think was the strongest of all of the things I saw. The reason for that is the Mini is one of those things where it is, in my opinion, and granted, but I did see this from other folks I polled internally, I think it fits so nicely in your hands and this is a very well-designed product that has a bigger screen. It's very easy to use and it's more functional than it's ever been. It's really nice to see a more turbocharged iPad Mini. I think we've been waiting for that for a while. Among the things that Apple introduced, I think that one is the winner.

Hill: Microsoft announced it is raising its quarterly dividend by 11%. The company also announced a $60 billion stock buyback program. Shares of Microsoft up 1.5% today and I get that this is a little boring. But I don't know about you, I would rather see Microsoft do this with their cash than spend $60 billion on an acquisition that may or may not pan out and if it does, it will take years to do so.

Beyers: Give Microsoft the appropriate golf clap here. This is a smart move. I love Microsoft, and Chris, you and I have talked about this multiple times, I love Microsoft when it does things like this because this is how you get a long-term 9% to 13% annualized return. You can get bigger than that. It may be less than that from time to time, but when you have a company that just absolutely gushes cash and then takes some of that and says, "Hey, you know what, we're going to put it to work, we're going to keep raising the dividend, and keep paying you." Wonderful. Yes, I like money. Please keep paying me. That's a really good thing. The buybacks too, Microsoft does have more than enough cash so they can do these buybacks and they tend to have a bit of a material difference. It's $60 billion, it is going to have a material difference here. I completely agree with you, Chris, just going back through history, Microsoft has a troubled path with making really large acquisitions. Skype is a good example here. Over $8 billion, that didn't really work very well. Why do you do that when you have some of the world's best engineers and you're actually showing signs of innovation? Microsoft Teams, for example, just through organic internal development, then you put that cash to work can have the greatest impact and this is where it can have the greatest impact. I really believe that, Chris. I know Microsoft is fully valued, but I really believe there is a scenario in which over the next 20 years, Microsoft's like a 10% or slightly higher returner over that period of time, which would be astounding.

Hill: [email protected] is our email address. There's one coming from Dave Zambrano, who says, "I enjoy your podcast every night while walking my dog. It's full of great insights." Thank you. Thanks for taking us along on the walk. We always love learning where people listen to the show. David goes on to write, "I'm wondering why nobody is talking about McAfee. It's up a bit more than 50% since their IPO, they pay a dividend, they beat expectations in the second quarter, yeah, when everybody is talking about cybersecurity stocks, this seems to be off the radar. Am I missing something?" Great question. Yeah, I will confess, McAfee is not the first, second, or third cybersecurity stock I think of when I'm thinking about that universe. I will just add for context, David sent this email in late August. The stock is still up from its IPO, but it's not up 50% like now, it's up about 15% from the IPO. But still, great question. What do you think about McAfee?

Beyers: It's really interesting -- by the way, I thought that the way that David phrased that question, he was saying that his dog had great insights. I hope that's amazing. I hope that's right, David, you get great insights from MarketFoolery and your pup. That would be amazing.

Hill: I was thinking the opposite. It's like, the show is fine and it helps me pass the time, but my dog, my dog has insights.

Beyers: My dog has insights. Look, I think we don't give our dogs enough credit. McAfee is an interesting company. But the reason and I will speak only for myself. In my analysis of this, Chris, I don't want to be on the business end of a trend that's moving against a company. McAfee is primarily engaged in what's called endpoint protection. This is like antivirus software. It's not that's the only thing they do, but that's their historical business. They do wrap some other things around it. They generate a ton of cash flow. But it's tough, if you are going to be invested, particularly in a tech business, I want that business to be looking forward, not trying to tightly grip its past and squeeze that for all it's worth. I do think McAfee is trying to look forward a little bit, but antivirus software is not how we are going to be protecting endpoints. It's just not.

What we're looking at is taking a look at data, pouring that's coming into our iPhones our computers and other things like that and try to be predictive about the attacks that are coming, so we could make decisions about traffic that shows up at the front door, at the phone, at the computer, not scanning a device for the stuff that's already inside it, but actually trying to put a sentry in front of the door. That's more like what CrowdStrike does. I think that's more of the future than what McAfee does. That's something I dislike about McAfee. Now, I will admit, good cash flow, decent but not great balance sheet. But here's the thing, that cash flow, Chris, it gets a lot of artificial sweetener from things like stock-based compensation. I want to see subscriptions driving more of that cash flow, if I see that, then maybe I'd give McAfee a second look. But since that's not really happening right now, I'm going to pause and let McAfee be McAfee and I will start fishing elsewhere.

Hill: This is a $9 billion company. Do you think there are enough things going on at the business that someone larger might look to take them out at some point?

Beyers: It is ripe for a private equity buyout, like a big -- here's what would be really interesting. I will just play the game of what I would love to see. I would love to see Thoma Bravo come in, take these guys over and completely reshape the company, because they are unlike any other tech-bases private equity firm, they actually come in to reinvest, restructure, actually set it up for long-term success. I really think McAfee needs a private equity buyer with the resources to do that, because otherwise, it becomes a game of incremental tweaks and at some point, the tweaks are no longer getting you far enough and you just start to lose value.

Hill: Tim Beyers, always great talking to you. Thanks for being here.

Beyers: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.