It’s a tech tradition like no other. Tech companies husband cash when times are good so they can keep growing when times are tough. The joke is, “Dividends mean we don’t have anything better to do with the shareholders’ money.”
You can see it in Amazon’s first quarter report. Free cash flow was negative $18.1 billion for the 12 months ending in March. Yet Amazon had $15 billion in capital spending during the quarter. This was possible because it had over $66 billion in cash and marketable securities on its books at the end of the period.
AMZN Stock and the Miracle of Cash
For generations before the cloud, companies borrowed money to fund long-term investment.
Some tech companies still do, even cloud companies. Consider a data center REIT like Equinix (NASDAQ:EQIX), whose structure requires it pay out profits as dividends. Equinix had $14.7 billion in long-term debt on its books at the end of March, against $1.7 billion in cash. It sent out nearly $290 million to shareholders in the form of dividends during the quarter, $3.10 per share.
But that cash is now in the hands of investors, not Equinix’ management. It was only able to grow revenue 8% from the first quarter of 2021 to the first quarter of 2022.
It’s the same story for Equinix’ rival, Digital Realty Trust (NYSE:DLR). Digital Realty had just $158 million in cash at the end of March. It had just $2.5 billion in capital spending during 2021. That’s a tiny fraction of what Amazon spends.
Even Equinix is less generous to shareholders than old-line companies like AT&T (NYSE:T). It ended March with $174 billion in debt. While its market cap is $151 billion, its enterprise value may be twice that. But most of AT&T is controlled by bondholders. Before the cloud, AT&T had the biggest capital spending budget in the world to keep the nation’s phone lines running. Last year it spent $17.4 billion, not just less than Amazon, but less than Alphabet and Microsoft (NASDAQ:MSFT) as well.
The Miracle of the Cloud
Tech’s miracle of cash is also its miracle of cloud.
Companies funded by debt, whether tech companies like AT&T or oil companies like Exxon Mobil (NYSE:XOM), may wait years for a return on the investment. The return of capital matches the length of the debt.
In the cloud, returns come much faster.
AWS, which is Amazon’s cloud unit, had revenue of $65 billion over the last 12 months, 37% more than in the previous year. But that cloud also handles the rest of Amazon’s operations, its store, its logistics, and its media. All those units would have had their growth curtailed, or reversed, without the growth of AWS, which reported one-third of revenue as net income during the last quarter.
The Bottom Line
If you’re just looking at the stock charts it seems ridiculous that Amazon still sells at 55 times earnings.
But history, and cash, say it’s not. By that standard, Microsoft is a bargain at 28 times earnings and Google is a steal at 21.
The reason is cash. The cloud is powered by cash, which can quickly turn to profit once it’s deployed. Big cash balances let the cloud czars continue to invest even when business, and cash flow, turn down. This sets them up for profitable growth down the road.
Cloud investors have a choice. They can get their money back quickly through dividends by buying a data center REIT like Equinix or Digital Realty Trust. Or they can keep their cash working with the czars.
I’m staying with the czars.
On the date of publication, Dana Blankenhorn held long positions in AMZN, GOOGL and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack.
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