Apple has reported quarter after quarter of extraordinary earnings, with the most recent period the best ever. That leaves the company with no debt and $76.2 billion burning a hole in its pocket. (Here's a Wall Street Journal report about it, and here's the balance sheet from Apple's website for you wonky, accounting types.)
So what is Apple (AAPL) likely to do with all that cash? The best guess of Kevin Landis, manager of the Firsthand Technology Opportunities Fund (TEFQX) and a veteran Silicon Valley investor, is: not much - and if he's right, he said, it will be a good thing.
Many companies sitting on such a stockpile might be tempted to go on an acquisition binge. Indeed, Bloomberg News reports that Apple is weighing a bid for the online TV service Hulu. With tens of billions of dollars in cash to play with, Apple may be linked with any technology company that's up for sale or not up for sale. Still, Landis expects Apple to keep its wallet safely sheathed.
The reason that Apple has such high cash flow is "that it developed a business model that wasn't overly capital intensive," he told MoneyWatch. "Apple could build its own chip [fabrication plant] for $2 to $3 billion and go the route that IBM did and be the biggest chip manufacturer in the world, but that's kind of [antithetical] to how they got there. Their focus is on designing great products and having someone else [make them]. Could they snap up companies in China that are doing it? Yes, but why would they need to?"
Apple could return some of the cash to shareholders, he predicted, either through a share repurchase or by paying its first dividend in more than a decade. "It may do some of both," he said, "just enough [to satisfy] people who are clamoring for those things."
Landis acknowledged that keeping all that cash on the books will diminish Apple's return on equity. It's a matter of basic arithmetic: Apple's operating business - selling technological devices - generates an ROE in the neighborhood of 40 percent, meaning that it makes about 40 cents of profit for every dollar of shareholder value. But the cash and securities earn the same few pennies or even fractions of a penny for Apple that they do for us mere mortals, so having it dilutes over-all ROE.
Investors and analysts realize that fact, Landis said, and are unlikely to hold a reduction in ROE against Apple. Instead, he said, they will focus on the financial security that so much cash gives Apple and the freedom that it gives Apple's executives.
"It will certainly hurt their ROE, but good companies hope to have this problem," he remarked. "I would hope that they spend as much time asking themselves how they got in this situation than asking themselves, 'What can I spend this money on?' "
Landis believes that Apple's leaders will ask those questions and answer them appropriately. He expects them to "buy just the right assets and focus on the right part of the value chain," he said. "They're not going to buy a winery."