Apple Fumbles the Cash Question

With every quarter of another phenomenal success, Apple Inc. (Nasdaq: AAPL) is compounding the problem of what to do with its growing cash pile. It's time for the company's board of directors to seriously consider practical steps for what to do with the money, including the possible acquisition of businesses in adjacent or even non-competing sectors and spinning this out to shareholders.

What a story: The company that dramatically overwhelmed rivals in the consumer electronics market doesn't know what to do with the fruits of its success! Apple now has $97.6 billion in cash, and according to CFO Peter Oppenheimer, management and the board of directors are "actively discussing the best uses of our cash balance." They haven't found a resolution yet, and due to the legacy of how the funds were built up and the lack of a roadmap from the beginning, I think this is a problem that will continue to gestate, feeding on the company's continuing success to double each quarter.

Pressed repeatedly for clarification during a conference call yesterday about the potential "uses" of the huge funds the company has in cash, short-term, and long-term marketable securities, Oppenheimer insisted the discussions at the management level were ongoing, but that no firm decision had been taken.

If Apple manages its business the same way it is managing the issue of its cash, it wouldn't be the world's most successful consumer electronics company. The cash itself is not the problem (it's a mind-blowing windfall), but not having a plan year after year for its use is even as the mountain of money continues to grow.

Here are the stats from the latest results: Cash flow from operations in the December quarter was a prodigious $17.5 billion; net income rose to $13.1 billion, more than double the $6 billion it had in the comparable 2010 quarter; sales jumped a staggering 73 percent, to $46.3 billion, from $26.7 billion; and unit shipments of both the iPad and the iPhone more than doubled during the same period.

The company is generating cash at an extraordinary pace. It closed the September quarter with approximately $82 billion in cash, short–term, and long-term marketable securities and added more than $15 billion to this in a single quarter. That is simply phenomenal and unprecedented. At this pace, Apple could close its fiscal 2012 with as much as $200 billion in cash if it still cannot figure out what to do with it or how to distribute it to shareholders.

Apple created this nightmare and must find a resolution quickly. The company at one time kept the cash it generated because its growth, while rapid, was also initially tentative at the beginning of this century. It had branched by the middle of the last decade into the consumer electronics market first with the iPod and then the iPhone and was unsure what the future held. At the time, it made sense to keep a large cash reserve to fund R&D as well as any other acquisition and supply chain initiatives.

Apple has successfully done all this, and it has more than enough money to maintain this. Plus, the free cashflow it generates quarterly from many high-margin businesses for the foreseeable future ensures it is unlikely to run out of funds anytime soon. So, it's time to whittle down the pile.