Apple may finally have Wall Street off its back with its announcement of allocating capital to shareholders, but now the question lingers, just what exactly is the company planning to do with its $145 billion cash hoard?
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The company said Tuesday that it is pouring an additional $55 billion into its buyback and dividend programs, bringing the total amount of capital returned to shareholders to $100 billion by 2015. It has increased its buyback program to $60 billion from $10 billion and has boosted its quarterly dividend 15 percent, from $2.65 to $3.05 a share. But, the company isn't tapping its cash pile to return value to shareholders, instead it's going to take on debt.
Now, this actually makes sense for Apple from a tax perspective. As Peter Oppenheimer, the company's chief financial officer, said in the earnings call Tuesday, if the company repatriates the cash it has offshore into the U.S., it's going to be hit with a hefty tax bill. But it also leaves plenty of room for speculation about what Apple has planned for its massive offshore balance.
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"If it was me, at these levels, if I'm spending this cash to do something innovative to return value to shareholders, then it's a good idea," said James Brehm, a technology analyst at BioComopass Intelligence. "But if I'm just sitting on it, I don't know, it could be a wash. ... Now, they could hoard it for a huge acquisition of intellectual property or—I don't know—for the end of the world? I mean, that is just an enormous amount of cash."
Acquiring a slew of smaller companies which are already building products and services for the Apple ecosystem could help keep breathe new life into the company, said Brian Sozzi, an analyst for Belarus Capital.
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"I think they need to be buying companies inside their own ecosystem, say app developers with top ratings," Sozzi said. "In a way, they would be getting the currently hot technology, but also a steady stream of new talent that could keep the company at the leading edge well into the future."
Buying smaller companies to grow its ecosystem or expand its reach into new markets may make more sense for Apple because the company can't really capture much market share if it tries to take over another handset maker, Brehm said.
The handset makers that could be taken out would only give Apple an additional two to three percent of the market, he said.
A company in Apple's situation needs to look out the traditional computing market or it needs to innovate what it has—which includes offering smartphones in different sizes at different price points, Brehm said.
"They could try to hit everyone's specific taste with their handsets or they could move into the Internet of things," he said. "That market is growing at tremendous rates. Whereas the handset market is pretty much tapped out, the connected space is growing."
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The Internet of Things (IoT) is built with machine-to-machine (M2M) technologies, which consists of wireless and wired systems that enable devices to communicate with each other. This space is prime for acquisitions, Brehm said.
Besides acquiring smaller companies, the iPhone maker could also drive innovation by making massive investments in research and development, analysts said.
"They need to invest in R&D and make sure that they can still attract the best talent possible. And that means paying their employees more," said Trip Chowdhry, managing director of equity research at Global Equities Research.
Chowdhry, who has an overweight rating on the stock with a price target of $600 for a 12 to 18 month period, said that he sees Apple unveiling a smartphone in different forms—like a phone with a bendable screen—but said he sees the company also investing in completely new product markets.
"They are working on groundbreaking products that you and me have not even imagined," Chowdhry said. "It's not like the engineers at Apple are twiddling their thumbs, they are thinking and imagining a world that we can't even imagine."
Analysts widely expect Apple to unveil an Apple TV sometime by the end of the year or beginning of 2014. There is also speculation that an Apple smart watch is in the works. CEO Tim Cook even hinted at the potential of entering new product markets in the company's earnings conference call on Tuesday.
"We see great opportunities in front of us, particularly given the long-term prospects of the smartphone and tablet markets, the strength of our incredible ecosystem, which we plan to continue to augment with services, our plans for expanded distribution, and the potential of exciting new product categories," Cook said.
The fact that Apple also has plans for "expanded distribution" also presents the opportunity for Apple to invest heavily in supply chain management, Chowdhry said.
A deal between Apple and China Mobile—China's largest wireless carrier—is likely going to happen near the end of the year, according to analysts. As Apple continues to grow its presence in China and other developing countries, it will need to invest in a better manufacturing strategy of its devices, Chowdhry said.
"They should also invest in manufacturing. If their customers are in the U.S., they should manufacturer in the U.S. If their customers are in India, they should invest in India. If their customers are in China, they should invest in China," Chowdhry said. "The current manufacturing model is an old recipe. Everything being made in China and then shipped from China is a broken model. They have the cash position to take advantage of shifting manufacturing economics."
The tech giant should also put some cash to work in expanding its retail presence, Sozzi said. While Apple's competitors in the smartphone and tablet space are increasingly pushing into the retail space, Apple seems to be falling behind, he said.
"I think they are not being as aggressive as they could be in opening retail stores. Microsoft is opening stores, Google rumored to be thinking. Amazon will probably have some in the future," Sozzi said. "I think more stores would position them well to win the next battle: the battle for the living room/electronically controlled home."