Apple (AAPL 1.37%) is sitting on massive amounts of cash on its balance sheet. The tech giant has more than $200 billion in cash and liquid investments, and the business generates massive amounts of money on a recurring basis.
Everyone has an opinion about what Apple should do with all that money, and avoiding big mistakes can be crucial when it comes to allocating capital smartly. In the following roundtable, our contributors highlight three important money missteps that Apple needs to avoid.
Andres Cardenal: Apple has a clear and well-defined strategy when it comes to acquisitions. The company doesn't make aggressive moves in this area; it typically buys small companies that are offering products or technologies that Apple wants to incorporate into its own products. The largest acquisitions in the company's history was Beats Electronics, the headphones and speakers company purchased last year for $3 billion. This is still a relatively small deal for a company like Apple, with a market capitalization of more than $640 billion.
I would really hate to see Apple departing from this philosophy only because it has lots of cash on its balance sheet. Money can be a temptation, but management needs to maintain discipline, and only buy the right companies for a fair price as opposed to aggressively pursuing purchase targets.
In any case, Apple stock is attractively valued at a P/E ratio of 13 times earnings during the last year. If the company is going to go shopping, buying its own stock is a much better idea than making dubious acquisitions just to put capital to work.
Steve Symington: Though Apple ended last quarter with an incredible $202.8 billion in cash and marketable securities, keep in mind that $181 billion of that total (roughly 89%) is held outside the U.S. But one thing Apple absolutely shouldn't do is bring that cash back to the United States -- at least not yet. Because in doing so, Apple would incur a massive repatriation tax bill at a rate of 35%, or more than $63 billion.
Thankfully for Apple shareholders, management has promised that this isn't an option as long as America's repatriation tax remains at such a high rate. CEO Tim Cook has previously made it clear that, even if it meant paying more in taxes, Apple would be willing to move capital back to the U.S. if rates were reduced to a more appropriate range in the "single digits."
In the meantime, Apple has plenty of cash to fund its U.S. operations, and has a brilliant debt strategy in place to fund its ambitious capital returns programs. But for now -- and as much as it might bother some patriotic investors -- it simply doesn't make sense for the folks in Cupertino to move the bulk of their cash stateside.
Tim Green: Rumors have been swirling recently that Apple has plans to get into the business of producing original content, perhaps in an effort to compete against companies like Netflix and Amazon. Apple reportedly made a bid for the former hosts of Top Gear, but Amazon ultimately won out, committing a staggering $250 million for 36 episodes of the new car-centric show.
Producing a meaningful amount of original content could cost Apple billions, and while Apple's massive pile of cash can easily absorb these costs, that doesn't make it a good idea. Presumably, any Apple video streaming service would have to be available on a wide variety of devices, both Apple and non-Apple, to be successful, much like how Apple music will be available on Android later this year. The question, then, is what's the point?
Apple is good at designing hardware and software that work together, producing devices that have proven to be extremely popular. Is Apple also good at producing original TV series and movies? Maybe, but there's no reason to believe that will be the case. Even Disney, which has been in the movie business for decades, still produces massive flops from time to time.
Successfully making original content is hard. The fact that it's expensive is easily overcome by Apple's balance sheet, but it's a business that seems well outside Apple's circle of competence. Even though Apple could easily afford it, pouring billions into original content sounds like a bad idea to me.