Why are the “Big Five Tech” expensive? Not just performance, but $140 billion in cash on the books!

wallstreetcn ·  02/12 14:52

In the current market environment, the huge on-book capital of Microsoft, Apple, Google, Amazon, and Meta means more room for repurchases.

Driven by the rebound of tech giants, the increase in the US stock index has further expanded. Following a 54% surge last year, the NASDAQ 100 index has risen more than 6% since this year.

Tony Pasquariello, head of Goldman Sachs's hedge fund business, used a chart to show the “jaw-dropping” market since the beginning of the year. The “carnival” of a few stocks continued, and the top 5 stocks in US stock market capitalization contributed 70% of the increase. UBS said bluntly that “tech giants” will continue to benefit from a clear profit path and may continue to lead the way in 2024.

According to data compiled by the media, up to the fourth quarter of December 30 last year, the five major tech giants Microsoft, Apple, Google, Amazon, and Meta hit a new high in cash reserves, totaling nearly 140 billion US dollars. According to media analysis, it can be seen from the cash in the hands of tech giants that these companies still have 100 billion dollars of profit that have not been released, and the rise may continue.

Angelo Zino, a researcher at CFRA Research, said that because these companies already have strong balance sheets and high net cash positions, investors can judge that these companies will give back more cash to shareholders in the future, and focusing on return on capital will help increase shareholder value in the future, which is better than holding too much cash on the balance sheet.

According to media analysis, judging from the size of these technology companies, it is now becoming more and more difficult to spend this money. First, it is not easy to find investments that can continue to drive growth. Second, it is because these companies are becoming the focus of attention of regulators. Currently, when considering acquisitions, technology companies have to consider the attitude of the supervisory authorities, which actually increases additional costs.

As a result, tech giants chose another way to spend their money — repurchase:

Apple: It repurchased $20.5 billion in the fourth quarter, remaining $53.6 billion from the $90 billion previous mandate, and has $173 billion in cash and cash equivalents.

Google's parent company Alphabet: It bought back $16.1 billion in the fourth quarter, remaining $36.3 billion from the $70 billion previous mandate, and held $111 billion in cash and marketable securities.

Meta: It repurchased $6.3 billion in the fourth quarter, remaining $30.9 billion from the $40 billion previous mandate (and announced an additional $50 billion share repurchase mandate), and has $65.4 billion in cash and marketable securities.

Microsoft: Repurchased $4 billion in the fourth quarter, $60 billion remaining in the previous mandate of $15.9 billion, and $81 billion in cash and cash equivalents.

Buybacks have been released well; will the rise continue?

The analysis points out that buybacks reduce the total number of shares in circulation of the company, and when profits remain the same, earnings per share will rise, thereby helping to boost the company's stock price. Executives often use buybacks to show that they believe their company's stock is undervalued and worth investing in.

Historically, buybacks have been more common among mature companies, which focus on returning cash to shareholders, compared to startups that tend to use cash for expansion, investment in new facilities and equipment, research and development of new products, or acquisitions.

Berkshire chief Warren Buffett is a big fan of stock buybacks. In his view, buybacks have many benefits: they are beneficial to shareholders and stock sellers, safer than acquisitions, more effective than dividends, and a way for executives to express their concern about shareholders' returns.

In the tech giants' quarterly reports, another detail worth noting is the use of dividends to give back to shareholders. For growth stocks, dividends have not always been an effective way to boost stock prices. Many investors believe that when growth stocks begin to pay dividends, it is when they reach the end of their growth. However, the market's reaction after Meta's dividend last week seems to indicate a change in attitude towards dividends.

The founder of asset management company Deepwater said that if you look back at the past 10 years, when technology companies began to pay dividends, growth began to stop, but while Meta announced dividends, he also said he would continue to invest. This is actually telling shareholders that they can complete AI and metaverse growth on their own. Investment bank Baird also said that in the era of generative AI, dividend distribution is no longer a sign of slowing growth.

The big four tech giants have frantically bought back over the past ten years

According to S&P Global (S&P Global) data, in the past ten years, the four largest US technology companies have invested more than 1 trillion US dollars in stock repurchases.

In the 10 years up to March 31 of last year, the four major US tech giants Apple, Alphabet, Microsoft, and Meta invested a total of 1.1 trillion US dollars in repurchases.

Apple's buyback force is the highest among US listed companies, with an investment amount of 621 billion US dollars. Alphabet ranked second with $193 billion in repurchases. Microsoft and Meta have repurchases of $180 billion and $130 billion, respectively.

Over the past 10 years, the top 20 repurchased companies have invested a total of about 2 trillion US dollars, accounting for about one-third of the total repurchase amount of 6.6 trillion US dollars of S&P 500 index constituent companies during the same period.

As a comparison, the US stock S&P 500 index rose as high as 150% in the 10 years ending March 31.


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