Big Tech's Not-So-Easy Money -- Heard on the Street
May 21 2017 - 11:29AM
Dow Jones News
By Dan Gallagher
There are some things even half a trillion dollars can't
buy.
One of those is freedom from Washington politics. Tax overhaul
promises from the Trump administration had lit up tech investors
eyeing a rather large purse. The 10 largest tech companies by
market cap are now sitting on a total of $545 billion in offshore
cash -- money seemingly just waiting for U.S. politicians to agree
on a plan that would allow those funds to be repatriated for
something significantly less than the current 35% tax rate.
The dim prospects for such a deal now had a noticeable effect in
the selloff last week, which handed the Nasdaq Composite its worst
day in nearly a year. Apple was among the hardest hit, falling 3.4%
that day. It's no coincidence that Apple has $230 billion sitting
offshore -- by far the largest overseas stockpile in tech.
That should at least curb some of the speculation about a
deal-making boom that could be fueled with that money. Such chatter
tends to inflate valuations of smaller public and private companies
banking on a buyout. It also feeds rumors of fantasy matchups, like
Apple buying Netflix or Disney.
But cash stranded offshore still has some uses at home. In the
case of Apple, it has backed a growing debt load that finances the
company's dividend and share buybacks. Microsoft, Oracle and Cisco
Systems have also made use of debt backed by their overseas bank
accounts. For those four companies, offshore cash accounts for 28%
of their combined market cap.
Cash also helps moderate high valuations of big tech companies.
Apple's current multiple of nearly 16 times forward earnings is a
five-year high, but that drops to 12.7 times excluding the
company's net cash. Google parent Alphabet's and Microsoft's
forward earnings multiples get discounted by 14% and 9%,
respectively, excluding their net cash.
It's also worth remembering that bulging bank accounts aren't
the only good reason to buy into Big Tech right now. Google,
Microsoft, Amazon.com and Facebook in particular have capitalized
effectively on their scale and continue to widen the lead over
smaller competitors. Apple appears to be on the cusp of returning
its iPhone business to growth and further expanding its services
offerings.
And while repatriated cash could boost deal making, large-scale
M&A hasn't been a major factor in Big Tech's resurgence.
Microsoft is still in the early days of building on its $26 billion
purchase of LinkedIn last year, and that deal isn't part of the
company's growing Commercial Cloud operations. Google and Amazon
have largely been avoiding big deals of late.
That doesn't mean an actual repatriation tax break won't be
welcome. But the biggest tech companies right now are in the
advantageous position of not having to bank on it.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
May 21, 2017 11:14 ET (15:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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