The COVID-19 crisis has made it tough for companies with low cash reserves, negative cash flows, and high debt levels to survive. Meanwhile, companies that have plenty of cash and little debt should weather the storm and rebound after the crisis ends.
Today, I’ll highlight five tech companies that have more than enough cash to withstand the COVID-19 slowdown and other future crises: Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), and Amazon (NASDAQ:AMZN).
How much cash are the five tech giants holding?
All five companies recently posted their quarterly earnings. Apple led the pack in cash, cash equivalents, and marketable securities, but its holdings grew at a much slower rate than those of the other four tech giants:
|Company||Cash, Cash Equivalents, and Marketable Securities (Most Recent Quarter)||Growth (Year-Over-Year)|
Apple’s aggressive investments in its digital ecosystem, which include new services and acquisitions, reduced its cash position last quarter as sales of its iPhones, iPads, and Macs declined. But during the conference call, CFO Luca Maestri noted that Apple still had “an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation” with no liquidity issues throughout the crisis.
Microsoft’s cash position also grew as the growth of its commercial cloud businesses offset the weaker growth of its Windows OEM, hardware, and gaming units throughout the crisis. Alphabet’s Google and Facebook both grappled with slower ad spending as businesses shut down, but Facebook benefited from the strength of Instagram and fewer low-margin side bets than Google.
Amazon posted robust revenue growth last quarter, but higher costs related to COVID-19 (which could balloon from $600 million in the first quarter to over $4 billion in the second quarter) could throttle its cash flows throughout the rest of 2020.
Which company has the most manageable debt?
The five tech giants all have plenty of cash to cover their liabilities. However, Facebook has no short or long-term debt, and it can easily cover its remaining liabilities with its cash on hand — which explains why it grew its cash position at a much faster rate than its peers.
That’s also why the Federal Trade Commission’s $5 billion fine against Facebook for mishandling user data last year was considered a slap on the wrist. Alphabet also maintained a low debt-to-equity ratio despite facing similar fines in the EU, while the other three companies are shouldering significantly more debt.
|Company||Total Term Debt||Debt-to-Equity Ratio|
Apple increased its debt-to-equity ratio with a $7 billion bond offering last year. But unlike struggling companies in other sectors, Apple didn’t sell the bonds to raise cash — it merely took advantage of historically low rates to boost its liquidity. It then spent a large portion of that cash on buybacks, which reduced its number of outstanding shares and temporarily inflated its debt-to-equity ratio.
Instead, investors should pay closer attention to Microsoft and Amazon’s debt levels, since both companies are plowing more money into their growing cloud ecosystems. As the battle escalates between Microsoft’s Azure and Amazon Web Services (AWS), the two largest players in the cloud infrastructure market, both companies could resort to loss-leading strategies to grow their market shares. Tough competition from Walmart and Target could also force Amazon to ramp up its e-commerce investments.
The key takeaways
These five tech companies won’t run out of cash like battered companies in the retail, oil, and travel sectors. Instead, they’ll…
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