The $118 billion cash pile for Alphabet presents a new problem

(Bloomberg) — Alphabet Inc. A welcome new problem, by most accounts – how to spend the rapidly expanding pile of cash.

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The Google owner made nearly $29 billion in cash in the second quarter after cutting thousands of jobs and efforts to stem losses on his various ventures. That left Alphabet with about $118 billion in cash and short-term marketable securities, more than any other company in the Nasdaq 100 except Apple Inc.’s total. amounting to about $167 billion.

However, unlike Apple, which aims to return most of its cash to shareholders through share buybacks and dividends, Alphabet has a less clear capital return strategy, leaving investors looking for more details about its plans.

Daniel Morgan, senior portfolio manager at Synovus Trust Co. , in an interview: “We haven’t really had to address this issue with Alphabet in the past because they haven’t been very prolific at generating that kind of cash.” His funds own Alphabet shares.

In general, investors do not like companies with large amounts of cash and expect the money to be invested for better returns or returned to shareholders.

The three largest cash generators in the Nasdaq 100 — Alphabet, Apple and Microsoft — brought in a total of $84 billion last quarter, the most for any non-holiday period in history, according to data compiled by Bloomberg.

Alphabet stepped up its buybacks and expanded its buyback license to $70 billion in April. But last quarter, the company spent $15 billion on its stock, barely half the cash it brought in.

By contrast, in the past five fiscal years Apple has returned nearly $5 billion more than the record $454 billion in cash it brought in.

In July, Alphabet said Ruth Porat, who has held the CFO since 2015, would take on a new role as president and chief investment officer.

Alphabet does not pay dividends like Apple and Microsoft. In contrast to Microsoft, which agreed to pay $69 billion to video game maker Activision Blizzard Inc. Last year, Alphabet steered clear of big acquisitions.

Read: Activision and Microsoft Extend Close on $69 Billion Deal

Even if executives wanted to, Alphabet might not be able to pull off a major acquisition under increasing regulatory scrutiny. Microsoft’s road to closing the Activision deal has been difficult and Amazon.com’s acquisition of iRobot Corp. remains a challenge. The Roomba industry is under investigation by regulators.

“Having the potential to really make a big splash in the way Microsoft does Activision is challenging given the regulatory environment,” said Angelo Zino, chief equity analyst at CFRA Research. He said Alphabet will likely continue to make additional deals “on a very small level.”

For Synovus Trust’s Morgan, it might be wise for Alphabet to make more strategic investments like Microsoft has done with ChatGPT owner OpenAI. This, he said, would immediately boost shareholder value and help the company gain recognition for making its way in industries in which it has not traditionally been strong.

But for now, share buybacks seem to be the most common tool implemented to return cash to shareholders of big tech companies that make tens of billions in profits each quarter.

“Although Alphabet could always consider starting with a small dividend, we think it’s more likely to stick to the buyback approach,” Zeno said. “Dividends can send a perception that growth opportunities may not be strong.”

Technical chart for today

Over the past decade, Apple has embarked on the largest stock buyback program on Wall Street, which has led to a steady decline in its outstanding shares. The company has bought back more than $80 billion in stock over the past 12 months — the most of any US company, according to data compiled by Bloomberg.

Top tech stories

  • Sales of Huawei Technologies grew for the third consecutive quarter, after new businesses such as cloud services and an emerging smartphone unit helped mitigate the fallout from US sanctions.

  • A cybersecurity advisory panel in the United States will investigate risks in cloud computing, including Microsoft’s role in a recent breach of email accounts of government officials by suspected Chinese hackers, according to two people familiar with the matter.

  • California regulators have voted in favor of bot operators expanding their paid driverless services in the city of San Francisco, a major milestone toward commercializing the technology.

  • An investment by Amazon.com Inc. At Arm Ltd. For chipmakers that highlights the potential for both to profit from generative AI, a market that Bloomberg Intelligence estimates will exceed $1.3 trillion by 2032.

  • Alibaba Group Holding Ltd. has returned to growth in all its major divisions, defying the economic turmoil in China to take the first step towards a long-awaited comeback after more than a year of turmoil.

  • Shares of the Hong Kong-based international semiconductor maker fell after the results, while the company’s co-CEO Zhao Haijun told analysts on a call that the chip industry has slumped but the recovery is weaker than expected due to economic headwinds.

Earnings due on Friday

— With assistance from Julia Love, Tom Contiliano, Matt Turner, John Viljoen, and Ria Rao.

(Updates to add the first bullet in the Top Tech Stories section.)

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