The most liquid measure of the money supply – M1 – is up 4.8x since February 2020. Given the exorbitant inflation of the money supply, we are only in the early stages of price inflation. Cash-rich Technology companies can take several steps to combat inflation.
Now is not the time for cash-rich Technology companies to stockpile cash as the price of goods, services and employees will continue to climb as a result of expansionary monetary policy.
- Acquisition opportunities with reasonable valuations are scarce. We would not pull the trigger on large acquisitions until valuations begin to normalize, even if that means waiting several years.
- Paying a cash dividend makes sense.
- Share repurchases do not make sense unless your stock trades well below the peer group.
- Our favorite use of cash is to accelerate investment in R&D/Product and Sales & Marketing – particularly for market-leading Technology companies. Now is a great time for market leaders to double-down and widen the competitive moat. Consider allocating capital to initiatives that will generate ROIC over the near, intermediate and long-term. It is difficult for me as an outsider to suggest an allocation mix across the three time horizons as capital allocation must be aligned with multiple corporate initiatives. That’s the difficult part. Running a company isn’t a color by numbers activity.