The View

Tech giants have matured and are sitting on a pile of cash

Alphabet, the parent of Google, Apple, Cisco, Microsoft and Oracle collectively are hoarding a cash pile that totalled US$504 billion at the end of 2015.

PUBLISHED : Wednesday, 25 May, 2016, 11:58am
UPDATED : Wednesday, 25 May, 2016, 1:37pm

When history comes to record the moment at which the hot hi-tech companies of today became the staid big corporations of yesteryear, they may well turn to the recently issued Moody’s report showing how much cash these companies are sitting on with little evident intention of investing it.

This is the first time in US stock market history that the top five cash hoarders consist exclusively of tech companies. Indeed the top five account for one third of cash balances held by all US non-financial companies. Alphabet, the parent of Google, Apple, Cisco, Microsoft and Oracle, had collectively amassed a cash pile totaling US$504 billion by the end of last year.

Such large cash holdings are a sure sign of companies somewhere at their peak, raking in money and sitting on it because they no longer have pressing investment needs and are unable to decide what to do with it, other than pay out bigger dividends.

When companies are growing they tend to be cash hungry and likely to be keen to put their cash straight back to work but there comes a time — and it is now for the hi-tech giants — when they are short on new ideas and are developing the kind of conservatism that is typical of large corporations.

There is another straw in the wind, which comes from Warren Buffett’s Berkshire Hathaway that has a strict policy of investing only in companies with stable cash flows and a high degree of predictability based on long-term performance. In other words it invests in rather boring but reliable companies.

Now Berkshire has taken a US$1billion punt on Apple, apparently at the urging of Buffett’s deputies, because the old man continues to insist that he does not understand hi-tech companies and avoids investing in things he does not understand. However he evidently trusts his deputies and has therefore been persuaded to take this significant position.

As so many market players look towards Buffett for guidance, a change of stance of this proportion cannot be anything other than influential and is a sure sign that hi-tech has been removed from the list of speculative plays.

In some ways this new respectability is to be welcomed by companies joining the solid investments club but in other ways it is alarming because with respectability comes the danger of sclerosis. Capitalism tends to be ruthless as its very DNA carries the seeds of creative destruction.

This is all far from saying that companies like Apple are done or even close to being done. However they are clearly no longer the next big thing.

The trick, as ever is to know what that next big thing may be. We are all brilliant when it comes to hindsight but foresight is quite another matter. Many people recall the ‘outstanding’ prediction made by The Quarterly Review in 1852 as US rail companies were reaching out to pioneer investors: “What could be more palpably absurd”, it said, “than the prospect of locomotives travelling twice as fast as stagecoaches?”

But then again whose crystal ball predicted at the turn of the last century that the 20th century corporate world would be dominated by industries such as automobiles, oil and gas, health care and indeed technology.

Yet investors are easily lured by the new and to disastrous effect. As Jeremy Siegel observed in his study The Future for Investors : “Investors have a propensity to overpay for the ‘new’ while ignoring the ‘old’.” In this process some big winners emerge but they “cannot compensate for the myriad of losers.”

Interestingly among the losers is Buffett who took his first and hitherto only foray into hi-tech with an investment in IBM back in 2011; maybe this helps explain the five-year hiatus before venturing back into this sector.

No doubt Buffett thought that IBM had met his criteria of maturity and predictability but our good friend hindsight proves he was mistaken. He may well prove to be wrong about Apple. This, after all, appears to be the view of other investors who have given its share price a bashing.

However there is no certainty in the world of investment and those of us who tend towards the conservative spectrum in stock picking should not be distressed by the fact that large hi-tech companies have joined the ranks of staid stock picks. On the contrary a business with a large cash horde and huge customer base is hardly a deterrent in my book.

Yet we all yearn for that crystal ball that will identify the next big winner. That said, there is no shortage of pundits and stock pushers who are busily claiming extraordinary powers of foresight. I trust them just as much as the fellow selling Mark Six tickets who has special knowledge of ‘magic numbers’.