Alphabet: The New King of Cash
Alphabet’s cash pile recently reached $117 billion, beating Apple by $15 billion.
Alphabet (NASDAQ: GOOG) recently became the world’s most cash-rich company, overtaking Apple (NASDAQ: AAPL) who held that title for 10 years. Alphabet now has $117 billion in cash, compared to Apples’ $102 billion, the Financial Times reports.
How has Alphabet become the king of cash?
After U.S. tax reform in late 2017, companies were incentivized to spend their money rather than just sit on it. This led to companies such as Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), and most notably, Apple, reduce their cash position. Apple, who was previously sitting on $163 billion in liquid reserves, reduced their cash position by $61 billion in the form of share buybacks and dividends.
Google’s parent company, Alphabet, on the other hand, stands out as they have not been taking full advantage of these new tax incentives. Alphabet’s cash position has only increased, leading them to overtake Apple as the king of cash. Although Alphabet will spend $13 billion on US real estate in 2019, their cash position will remain largely unchanged, leaving investors concerned.
What does this mean for investors?
While having cash to hand can often signal that a business is succeeding, investors need to ask why this money is not being put to use – there is an opportunity cost associated with this level of cash hoarding.
One way in which Alphabet have been spending their cash is through acquisitions such as Looker, the data analytics company acquired by Alphabet in June. Investors should question these acquisitions as a cash pile as large as Alphabet’s could lead to diworsifications. Going forward, however, these acquisitions are going to become more difficult to carry out due to stronger push back from the US government. Alphabet is already facing antitrust issues, being fined €8.2 billion ($9.3 billion) over the past 2 years.
Another way in which Alphabet have been spending their cash is through their “Other Bets” – Alphabet’s non-Google companies such as Waymo, Verily, and GV. These so-called “Other Bets” account for only 0.5% of Alphabet’s total revenue but have cost them $15 billion over the last 6 years. Fortunately for long term investors, Alphabet’s strong cash position makes this loss almost insignificant and these companies could provide serious returns in the next 5 to 10-year period.
Alphabet could assist investors by issuing dividends and share repurchase programs. However, in the four years that Alphabet has been repurchasing shares, they have only spent $1.7 billion per quarter. In comparison, Apple spent $24 billion in share repurchases in the last quarter alone. Although Alphabet has recently announced that $25 billion has been added to their stock buyback program, this will not have a meaningful impact on Alphabet’s cash position, as earnings will be increased to match in the coming months and years.
Alphabet isn’t the only company struggling to spend their cash, with Berkshire Hathaway’s (NYSE: BRK.A) cash and equivalents pile reaching $122 billion. Iconic CEO Warren Buffett has said time and time again that he would prefer to have this money invested, however, he is unable to find suitable businesses, as prices for businesses have become “sky-high”. With Berkshire Hathaway’s last major takeover more than three years ago, this money has instead been spent in share repurchases - spending $442 million last quarter. Unlike, Alphabet, this isn’t to say that they have nothing else to do with the money, Buffett simply believes “when our stock gets cheap relative to its intrinsic value, we wouldn’t hesitate”.
Investors are hoping that Alphabet’s additional $25 billion in share repurchases will be the tip of the iceberg. As antitrust tensions grow, one possibility is that Alphabet will have no other option but to continually increase their dividend and repurchase shares, which will be very beneficial to long term buy and hold investors.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon, Apple, Berkshire Hathaway, Facebook and Google. Read our full disclosure policy here.