Why Apple Needs Its $137 Billion Cash Hoard

moneybin

Yesterday, there was a bit of a hub-bub about Apple’s enormous $137 billion cash hoard, after David Einhorn, the head of Greenlight Capital, sued Apple over a plan to discard preferred stock and pressed Apple to give a significant chunk of the cash hoard directly to investors. It was such a big deal that Apple felt as if it were forced to respond.

Is there a good reason for Apple to be keeping $137 billion in the bank? Yup, and if you want to know why, all you have to do is look at Dell.

There was a time not that long ago when Dell was at the top of the world, and Dell’s founder and CEO was saying that Apple should close up shop and return all of its money to investors. Just 15 years later? Dell is an afterthought in the PC market, and is trying to make itself a private company again to save themselves from the very stockholders who have helped drive the company into the ground.

As a fantastic post by Barry Ritholtz over at The Big Picture makes clear, what happened to Dell is a perfect reason why Apple should hold on to as much cash as it can, while it can.

If you want to know why Apple is holding onto all that money (aside from obvious tax considerations), just look at Dell. It is a cautionary tale than any technology company can miss the next shifting tech trend and quickly become irrelevant. Bang, you are the next Maytag. Even Microsoft’s history offers a foreboding look at using special dividends as a salve to investors concerned only with their quarterly P&L (and personal compensation via 2 & 20 fee structures).

David Einhorn is a great investor (and a nice guy), but he joined the Apple party somewhat late, and suffered a setback last year with the rest of shareholders once the law of big numbers set in. He is now suing the company because they have too much cash…

Technology is a fast moving sector of the economy, where trends shift quickly and alliances change overnight. Having a cash hoard gives Apple maximum flexibility to deal with this for their future.

In other words, Einhorn and his compatriots bought Apple stock at $700, thinking it would hit $1000. When the market turned against AAPL, he decided to sue Apple to get his money back directly out of their cash holdings. Bad form.

To investors like Einhorn and Wall Street at large who just don’t get Apple, Ritholtz suggests this response:

Sorry if after 30 years, changing the dynamic in no less than 6 industries, creating the biggest technology firm in the world and briefly, the biggest company of any sort on the planet, we had a bad couple of quarters. That was inevitable.

Couldn’t have said it better myself. Make sure to read the whole post.

  • FriarNurgle

    Investors offer no benefit to society. I look forward to them all being eaten when the Apocalypse comes.

  • lwdesign1

    What is especially crappy about this is that Apple DIDN’T have a bad couple of quarters! Sales of products (except the delayed iMac) were up, income was highest ever, products fly out the door around the world, and Apple is making new markets in new countries all the time. The ONLY downside to Apple’s situation comes from the Wall Street Journal and others “predicting” what Apple would make, and Apple didn’t live up to THEIR predictions. This is how you manipulate stock prices and bring them down by hundreds of dollars PER SHARE even though the company is turning in highest ever and record results and profits.
    Stock price has nothing whatsoever to do with the actual value and productivity of a company. It can be inflated or deflated by some pundit expressing his opinion on how Apple is doing. You get some “analyst” who pulls out of thin air that Apple isn’t doing well, and panicky investors immediately want to sell so they don’t lose money. Investors are gamblers, pure and simple. They have no loyalty to the companies they invest in. They’re in it for the short term to see how much money they can pull out, just like a wino at the track is hoping his hot tip on Snowshoe Rider in the 5th is a sure thing.

  • robert_walter

    Investors offer no benefit to society. I look forward to them all being eaten when the Apocalypse comes.

    Without investors (shareholders and debt holders) there would be few companies started or expanded.

  • Steffen Jobbs

    I hope Einhorn’s hedge fund really did buy Apple at around $700 hoping it would go to $1000. That would absolutely make my day. Apple was fading fast even though analysts were pounding the table for higher target prices. I definitely suspected something was amiss. I still don’t really know what happened, but Einhorn should have noticed. He’ll have to fight his ass off to get that money back and might just be able to lift Apple’s share price a bit higher in the process.

    I bought most of my shares in 2004 and refused to buy any more recently when analysts urged people to buy at $650, then $600, then $550, etc. All were yelling about some ridiculous slingshot propelling Apple shares to the sky. Not a chance. I’m not that greedy. Wall Street just killed those latecomers. I didn’t think a guy like Einhorn could get caught with his pants down, but apparently he did. Man, he sure must be stewing if he wants to sue Apple. He’s a poker player, so he must like to take risks. What’s his problem?

  • Steffen Jobbs

    Stock price has nothing whatsoever to do with the actual value and productivity of a company. It can be inflated or deflated by some pundit expressing his opinion on how Apple is doing. You get some “analyst” who pulls out of thin air that Apple isn’t doing well, and panicky investors immediately want to sell so they don’t lose money. Investors are gamblers, pure and simple. They have no loyalty to the companies they invest in. They’re in it for the short term to see how much money they can pull out, just like a wino at the track is hoping his hot tip on Snowshoe Rider in the 5th is a sure thing.

    You want to get a good cry? Take a look at LinkedIn today. See if there’s anything that company has to be able to have a P/E of around 1000. $150 a share, up $26 (21%) and no profits. A typical stock where the hedge funds can turn vapor into pure cash. Do you think there is any chance LinkedIn can return that amount of earnings within the next 5 years. Yet there are no disappointments. Everyone is popping champagne corks on Wall Street. This is the way things work. Companies really pulling in profits are worthless. Companies with no profits become highly valued. LinkedIn somehow has infinite growth while Apple has none. Go figure.

  • Steffen Jobbs

    Stock price has nothing whatsoever to do with the actual value and productivity of a company. It can be inflated or deflated by some pundit expressing his opinion on how Apple is doing. You get some “analyst” who pulls out of thin air that Apple isn’t doing well, and panicky investors immediately want to sell so they don’t lose money. Investors are gamblers, pure and simple. They have no loyalty to the companies they invest in. They’re in it for the short term to see how much money they can pull out, just like a wino at the track is hoping his hot tip on Snowshoe Rider in the 5th is a sure thing.

    You want to get a good cry? Take a look at LinkedIn today. See if there’s anything that company has to be able to have a P/E of around 1000. $150 a share, up $26 (21%) and no profits. A typical stock where the hedge funds can turn vapor into pure cash. Do you think there is any chance LinkedIn can return that amount of earnings within the next 5 years. Yet there are no disappointments. Everyone is popping champagne corks on Wall Street. This is the way things work. Companies really pulling in profits are worthless. Companies with no profits become highly valued. LinkedIn somehow has infinite growth while Apple has none. Go figure.

  • aardman

    Investors offer no benefit to society. I look forward to them all being eaten when the Apocalypse comes.

    Perhaps you mean speculators, not investors.

  • Andrew Newsome

    Investors offer no benefit to society. I look forward to them all being eaten when the Apocalypse comes.

    If you own a house and don’t rent, then you are an investor.

About the author

John BrownleeJohn Brownlee is a Contributing Editor. He has also written for Wired, Playboy, Boing Boing, Popular Mechanics, VentureBeat, and Gizmodo. He lives in Boston with his wife and two parakeets. You can follow him here on Twitter.

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