Technology and productivity: The hollow promise of the iEconomy

Feb 28th 2013, 21:44 by G.I. | WASHINGTON, D.C.

IN THE battle between David Einhorn and Apple over the latter’s $137 billion cash hoard lies a deeper lesson about the outlook for the economy. Mr Einhorn, an activist investor, says Apple clings to its money out of a “Depression mentality”. Perhaps. But the more mundane explanation is that Apple, like many of the world’s big companies today, is generating more cash from its existing product line than it can usefully plough back into new projects.

And that’s a problem. Apple is the most creative, innovative and envied technology company of our time, yet investors clearly doubt its ability to keep churning out hits at current margins, valuing it at just 10 times this year’s earnings, a ratio more appropriate for a mature value company.

To some, this might be comforting. After all, while the Dow may be flirting with an all-time high, Apple’s valuation suggests there isn’t much irrational exuberance going around.

But in another way it’s rather distressing. Let’s go back to the spring of 2000, at the peak of the Nasdaq bubble, when Cisco Systems embodied the hype and hope of technology. Cisco was, briefly, the world’s most valued company, with a market cap of $555 billion. Unlike many dotcoms, Cisco was nicely profitable, but not nearly as profitable as investors thought it would be one day: it traded at 135 times that year’s earnings. (Click on the nearby table for a comparison.) Compared with Apple, Cisco was a veritable spendthrift. Despite sales that were barely one-sixth of Apple’s today, its R&D budget was almost as large. Its cash pile, at $20 billion, was big enough (evidence that the phenomenon of cash-rich tech giants is not new), but then, there was no widespread clamour that Cisco hand it back it to shareholders; no one doubted Cisco would find a higher returning use for it.

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Silver Lining: Amid Devastation, Many Still See Gains In Burst Tech Bubble

Even Sufferers Cite the Value Of Innovation and Base For Longer-Term Growth — Looking Again to the Fed

By Greg Ip

Staff Reporter of The Wall Street Journal

2497 words

20 March 2001

The Wall Street Journal

A1

English

(Copyright (c) 2001, Dow Jones & Company, Inc.)

WASHINGTON — As the U.S. economy struggles with the bursting of the high-tech bubble, here’s an improbable question: Could there also have been a bright side?

Billions of dollars went down the drain in the past few years, to support high-tech companies that never made a profit. Years of entrepreneurial effort by the nation’s best and brightest were flushed away on failed business plans. Massive wealth was created, and then destroyed, leaving shattered confidence in its wake.

Yet the bubble also may have done society a huge favor. The technology-stock boom fertilized new technologies and business innovations, and it galvanized old-economy companies into accelerating their own adoption of these innovations.