Apple: Another Reason For Its Cash - Insurance Against Disruption

| About: Apple Inc. (AAPL)

Cash = Insurance
Much has been written about Apple's (NASDAQ:AAPL) enormous cash $81 billion dollar cash horde. I won't rehash the various debates about dividends, buybacks and such as they've been analyzed quite thoroughly. But one point absent from these discussions is the concept of massive cash as insurance against disruption.

We are in the most innovative period in human history, and the pace of change is accelerating. This is disruptive, and Apple undoubtedly realizes that it can't be everywhere at once - eventually technologies will arise from potential competitors which can decimate Apple's business. The cash stockpile gives Apple tremendous insurance against the emergence of a technology disruptive to their market dominance. They can outbid their competition for key intellectual property portfolios now (as they've done,) and if a company develops a technology which threatens them, they can just buy the company. Really, who can possibly outbid them?

Apple and a history of disruption

As an example, let's take a look at what will be one of the most disruptive technologies of the next decade - the confluence of artificial intelligence systems with advanced speech recognition technologies. Siri was a strategic acquisition for Apple precisely because of this confluence.

Apple has been at the forefront of three major revolutions in human-machine interface. The first occurred in 1984 when Apple launched the Macintosh - the first mainstream computer with a graphical user interface. This revolutionized the personal computer and made it accessible to a much wider range of people. Remember DOS? It was for geeks only. Apple made computers accessible to kids. (I'm happy to say my pop had the insight to buy me one of the first 500 Macs when I was a kid. I wish he bought me some stock also.)

The next revolution in human-computer interface occurred with the launch of the iPhone in 2007, but wasn't fully realized until the launch of the iPad in 2010. This mainstreamed the use of touch to control a computer, making them even more accessible to a far wider range of people, including small children who don't have the dexterity to control a mouse, and the elderly, who may not have the mental dexterity to learn how to use a PC. A whole generation of kids is growing up with the iPhone/iPad 'touch to control' paradigm, and we're just at the beginning. In a few years, today's iPads will soon seem as antiquated as the first Macs seem to us now.

And if you just don't get how profound the touch interface shift is, take a look at this - a magazine is an iPad that does not work. My friends' kids could work my iPhone before they could speak. This is revolutionary; believe it.

Voice Control + AI

Apple wisely realized that the next revolution in human-computer interface will be voice control combined with AI. Both technologies have been around for years, but the combination of the two, which allows a computer to understand natural language, is revolutionary.

Again, we are just scratching the surface of this technology. Five years from now, AI personal assistants will know your schedule, screen your calls and emails for you, make your appointments, record your favorite television shows, order groceries and do any other task which can be automated by voice. Apple's upcoming television will likely integrate voice control and AI, freeing us from the remote and allowing the TV to learn that you like to watch sports, but it can skip the home shopping and spanish language channels, and you want it to record the Colbert Report every night. And it will all be controlled by voice and intuitive learning of what you like and dislike.

Extrapolate that level of customization and learning, combined with the most natural form of interaction known to humans - speech - and you can see the potential of the technology in everything from business to medicine. I certainly would like an AI to help me filter the important emails from the hundreds I delete without reading, and so would every businessperson in the world.

Cash mitigates disruption

So what does Apple's cash have to do with this? Siri is a great start, but doesn't guarantee Apple dominance in the AI-voice recognition niche. Other technologies, like IBM's Watson, are potentially more dominant. If you recall, Watson is IBM's natural language AI which absolutely crushed the two greatest Jeopardy champions of all time - answering questions with such ability that it out-earned the masterminds $112,871 to $28,800 (for Ken Jennings) and $32,000 (for Brad Rutter) over a two day competition.

Put that technology into a cell phone and Apple will be worried.

Thankfully for Apple, Watson requires a massive hardware backend to operate, but that is only going to shrink over time. Eventually, Watson or some other AI will emerge which will threaten Siri. And when it does, Apple can just buy them out. Do you think IBM would turn down $20 billion in cash if Apple felt it needed to acquire Watson? I think not.

This is just one example, but it demonstrates why Apple should and will hold onto its massive cash stockpile. It knows it can't stay dominant forever through internal innovation. Eventually, someone will develop a technology which can destroy its business. And when that happens, Tim Cook will smile, write a big check, and enjoy another decade of dominance in the technology industry.

Apple shareholders should relax and enjoy the long rise. Apple's head start in voice controlled AI, plus the cash insurance policy will allow it to maintain impressive Y/Y growth, defying the law of large numbers by expanding from a consumer electronics company to one that dominates in all fields where voice control and AI provide competitive advantages - business, medicine, engineering - there are considerable applications in almost all fields.

This is just the beginning.

Disclosure: I am long AAPL; no position in IBM.

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