Tech Giants Are Sitting On Stacks Of Cash. A Buying Spree Could Be Next.

Tech Giants Are Sitting On Stacks Of Cash. A Buying Spree Could Be Next.
Reda Farran, CFA

over 1 year ago1 min

Mentioned in story

The ten biggest Nasdaq tech stocks have $150 billion in cash on their balance sheets. That’s huge money, even for these companies, as you can see from the chart. And it’s helping to fuel speculation that the tech giants might soon go on a buying spree, snatching up smaller rivals. There are a few reasons behind this speculation.

First, the $150 billion cash pile is much bigger than those during previous market corrections in 2008 and the early 2000s, meaning the tech giants have a lot more firepower they can deploy today. Second, smaller firms are trading at lower valuation multiples after this year’s selloff – and that means it’s less expensive for tech giants to acquire them. In fact, forward price-to-earnings ratios of small and mid-cap Nasdaq members are about one standard deviation below ten-year averages, according to Bloomberg.

You could turn this into an opportunity by trying to spot potential acquisition targets and buying up their shares. Smaller firms would see their share prices shoot up upon the announcement of an acquisition, since deals are always done above their current share prices. On the other hand, even the mere speculation of a potential acquisition often leads share prices to get bouncy. For example, speculation that Amazon (AMZN) was considering buying Signify Health (SGFY) and Electronic Arts (EA) helped boost those shares in recent weeks.

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