CNBC’s Jim Cramer has concluded that running a profitable, growing business in this market is kind of like walking a tightrope, with value investors who want to see cost-cutting on one side and growth investors who want to see spending on the other.
What tipped him off? Google parent Alphabet’s Monday night conference call, in which the technology giant’s management team went over its fourth-quarter earnings report with shareholders and Wall Street analysts.
“Multiple analysts excoriated them … for spending like a drunken sailor with no end in sight,” Cramer said Tuesday on “Mad Money.” “However, what really threw me was a question tossed out by a very good analyst, Brent Thill from Jefferies.”
Thill, a top tech analyst, asked management what they planned to do with the company’s huge cash hoard. He pointed out that it “has doubled in the last five years to $109 billion” despite Alphabet’s deal activity being much lower than that of its peers.
“Alphabet was circumspect with its answer, but I think Brent’s question cuts to the core dilemma of being a big, profitable growth company, because, in a way, all of that cash can be a curse,” Cramer said.
Because Alphabet’s value-driven shareholders want the giant to cut back on its spending, it ends up sitting on a “huge mountain” of cash with nowhere to put it, he explained.
“First, you need to understand Alphabet gets little to no credit for its cash hoard because the money’s not doing anything for them — they collect a little interest, big deal,” the “Mad Money” host said. “While the company announced a $12.5 billion buyback, that’s small change, simply not enough to move the needle for a $790 billion business.”
Worse, anything that Alphabet might consider buying is likely very expensive, especially considering how much Alphabet is already spending on research and development.
But spending the $109 billion could put Alphabet in an even tougher spot, Cramer said, pointing to the carnage that happened in IBM’s stock after it acquired cloud computing company Red Hat.
“At first, the market loathed this deal,” he said. “Stock got crushed. Didn’t help that this happened in the fourth quarter, when everything tech was falling apart. Lately, though, IBM’s come roaring back, especially after reporting a better-than-expected quarter a couple of weeks ago. Hey, maybe the Red Hat acquisition was a good idea after all, but the punishment for taking this kind of bold action was so upsetting that billions of dollars were lost instantly.”
Apple has a similar issue, Cramer continued. Growth investors and bold analysts at the likes of J.P. Morgan want to see the iPhone maker make a flashy acquisition in entertainment despite the fact that it already has some “incredible offerings” in the space, he said.
As for Amazon, a hint of margin weakness in its most recent earnings report tanked the stock despite other divisions like cloud and advertising, where the e-commerce giant spends a lot of money, being strong, Cramer said.
“So what should these tech titans do with all of their cash? I don’t really have any answers here, but I do know that they shouldn’t take their cue from the short-term gyrations in their stocks or the analyst critics,” the “Mad Money” host said. “My advice? You can’t please everybody, and in the case of Alphabet and Amazon and Apple, I think it’s a mistake to even try.”