If you want to run a profitable, successful growth business you have to perform a high-wire act that's damned near impossible.
Last night on what I regarded as a fairly nasty conference call, multiple analysts called out Alphabet (GOOGL) for spending with no real tomorrow in sight. I thought that was a harsh call, but when you think how little its Other Bets have made for the company, it's a legitimate concern. I sure wish there was a more linear cost and effect. There does, at times, feel like there is no amount of money they won't spend in pursuit of who knows what! After all, the only noteworthy Other Bet that has come in lately is Nest -- and I would rather have Honeywell (HON) spinoff, Resideo, than Nest.
But what really threw me on the call was a question tossed out by a very good analyst, Brent Thill, from Jefferies, who queried: "The cash position has doubled in the last five years to $109 billion, yet in the last four years, M&A has been about $3 billion, which is well below your peers." Thill wanted to know what the plan was for all that money and why wasn't it being put to better use. Sound like Apple (AAPL) ?
The company was circumspect, of course, which is why the question was a bit on the rhetorical side. But Brent's inquiry shows you how difficult a choice -- and oddly, a curse -- it is when you have all that money.
First, Alphabet is getting little to no credit for its cash hoard because it doesn't earn much for the company. Second, while they announced a $12.5 billion repurchase plan, that's just not big enough for anyone to think it is anything but a token of appreciation, just enough that you can hear Chuck Schumer and Bernie Sanders saying that money should go to their already well-compensated workforce.
Third, you have to figure that unless Alphabet can "fool" an Instagram-like property to sell for a billion, as Facebook did, it doesn't matter, it's incredibly hard for Alphabet to move the needle. The company's obviously spending a fortune on R&D or it wouldn't be criticized for all the margin-hurting spending it is doing now.
But then again, let's think about what IBM (IBM) did. The analysts over and over again had nothing good to say about their endless buybacks and dividends. To make matters worse, the buybacks and dividends seem to be being done in order to please Warren Buffett. He turned out to be a cruel task master who dumped the stock of IBM unceremoniously.
Then the company turns around and pays $34 billion for one of the best tech companies I follow, Red Hat (RHT) -- and while it is a full-price acquisition, it immediately puts IBM in the mix of tens of billions of dollars of cloud decisions that it never was in before.
What happens? The market crushes the stock. Just obliterates it.
Now consider Apple. Everyone yesterday was going gaga over the list of companies that it might buy -- as if that, too, would be the magic elixir for this company with a cheap stock and too little growth from its main line of business. I think that if it were to buy something related to health, that would be a huge win. Instead, people seem to want Apple to bulk up on entertainment, where l think they have credible offerings already and nobody seems to care.
Or take Amazon (AMZN) . It has spent fortunes to build up its cloud and retail businesses -- and I think they are top notch, but because there was a wee bit of a slowdown in U.S. retail for the holidays, it doesn't matter what diversification they do.
The obsession with what these companies will do with their cash is really part of the current zeitgeist of which I can safely say there are no winners and no right answers. I don't think Alphabet has any choice but to keep trying to find something great, the next big thing. Apple at least has that, with its service stream. Amazon? Rock and a hard place, if retail is slowing.
It all comes down to one thing: If Apple can't please people with that service revenue stream as it is currently configured, if Alphabet can't appease the analysts without a monster acquisition, if IBM can't please critics with a monster acquisition and if Amazon can't avoid a punishing, 100-point drop with better-than-expected top-and-bottom line figures, then we can only bet that if you please all, you please none -- and right now none are pleased.
