Apple stunned investors this week after announcing a historic $110 billion stock buyback program that effectively doubles its largest repurchase effort on record. But experts are split on whether it will be enough to push the stock meaningfully higher.
The iPhone maker revealed this gigantic allocation alongside its quarterly earnings report covering the second fiscal quarter of 2024 where the company also announced that its revenues shrunk by 4% compared to the previous year amid headwinds in the Chinese market.
Apple’s choice to invest over $100 billion in repurchasing its own shares shows strong faith from the leadership in the company’s future. However, some analysts wonder if this money could be more wisely spent on areas like artificial intelligence (AI), where Apple seems to be falling behind its competitors.
Apple Has More Than Enough Money to Spend That Much on Its Own Stock
The Board of Directors of Apple (AAPL) authorized this latest buyback program on 2 May alongside a 4% increase in the firm’s cash dividends, which were boosted to $0.25 per share, payable on 16 May this year.
This is not the first time that the Cupertino-based firm has invested that kind of money into buying its own shares. The last time when a significant amount was approved to this end took place in 2018 when the Board earmarked a staggering $100 billion to reduce the number of outstanding shares.
“Given our confidence in Apple’s future and the value we see in our stock, our Board has authorized an additional $110 billion for share repurchases. We are also raising our quarterly dividend for the twelfth year in a row,” the company stated in the official press release announcing the corporate action.
The company has been an aggressive repurchaser of its stock in recent years. In the most recent quarter alone, it bought back $23.5 billion worth of shares. At that pace, completing the full $110 billion authorization would take about a year.
By the end of this fiscal quarter, the firm boasted liquid reserves amounting to $67 billion along with non-current marketable securities worth $95.2 billion. In total, this means that Apple has a war chest of around $162 billion.
Moreover, during this same period, the firm generated cash flows from operating activities of $62.6 billion. The majority of these funds – around $43.34 billion – were used to repurchase its stock.
What this means is that Apple can easily repurchase $110 billion in stock in under a year without reducing its existing liquid reserves.
The Rationale Behind This Massive Buyback
Companies often turn to stock buybacks when they believe that their shares are being undervalued by the market. By reducing the number of shares outstanding, buybacks immediately increase earnings per share and are considered a good way to return money to shareholders with fewer tax implications compared to issuing a special dividend.
Apple has been experiencing headwinds to grow its business at a point when the global economy is facing a period of relative stagnation while key markets like China that should have helped the firm boost its top line are not performing as expected.
That said, the business is still quite healthy from a financial standpoint and Apple seems to be, in the absence of an innovative product or expansion strategy that leads to higher sales, progressively turning into a cash cow that executives are wasting no time to milk.
However, even though many applaud the shareholder-friendly buyback program, some analysts question if Apple’s massive cash reserves could be allocated elsewhere – primarily pointing to promising but capital-intensive areas like artificial intelligence (AI).
“Apple has said that its smartwatches have AI features and that it has the best consumer laptop for AI. But the company hasn’t seen much tangible benefit from AI compared to other large tech companies,” commented Geoffrey Seiler from The Motley Fool.
“Right now, it looks like Apple is behind in this area. It could be better served by investing in AI or buying a company that achieves the same purpose rather than repurchasing its stock,” he added.
Investors reacted positively to the buyback announcements, with the stock posting initial gains of as much as 8% during the first few hours of the 3 May trading session but ultimately settled with a 6% gain.
Thus far in 2024, Apple shares have accumulated a 5% loss while the S&P 500 has produced gains of more than 9% during the same period. This showcases investors’ reluctance to pour money into the iPhone maker’s stock due to its relatively unimpressive growth trajectory.
Analysts from various financial services firms that keep track of Apple stock have placed their targets for the tech firm’s stock somewhere around $210 and $250, implying a 15% to 37% upside potential within the next 12 months.
Weak Second Quarter Performance Includes a 10% Drop in iPhone Sales
Apple’s lackluster Q2 earnings results further deepened investors’ concerns regarding the firm’s outlook. During this period, the company posted total revenues of $90.8 billion resulting in a 4% year-over-year drop as it continued grappling with supply chain constraints, weak consumer demand, and production challenges in China.
The iPhone business segment, arguably the most important driver for the company’s financial performance, posted a disappointing 10% sales drop compared to a year ago at $45.9 billion. Meanwhile, iPad and wearables revenue also showed double-digit percentage declines while revenues from the Mac line bounced back to $7.5 million.
The services segment was the brightest spot in the report as it climbed by 14% to a new all-time high of $23.9 billion.
Despite the relatively disappointing results shared by Apple lately, the management had an upbeat tone and highlighted some positive developments including the launch of the Apple Vision Pro gadget and the hinted upcoming “exciting product announcements” last week and further reveals during next month’s Worldwide Developers Conference.
What to Expect from Apple Stock After the Buyback Announcement
Most of the upside that would come from the latest Apple share buyback program announcement has already occurred as investors have already adjusted their financial models accordingly.
As for its future performance, most of what Apple can do to improve its business results needs to come from either significant improvement in its existing product line – iPhone, iPad, and Macs – or the performance of its sales in key markets like China.
Just days after publishing its quarterly earnings report, Apple presented to the world a handful of new products including the new iPad Pro powered by an M4 chip and a brand-new Apple Pencil Pro.
The new iPad is the thinnest product in history for the Cupertino-based firm. Two versions will be marketed with 11-inch and 13-inch displays. Meanwhile, the company touted its latest M4 chip as being 1.5 times faster than the M2 that powered the previous generation of iPads.
“The power-efficient performance of M4, along with its new display engine, makes the thin design and game-changing display of iPad Pro possible, while fundamental improvements to the CPU, GPU, Neural Engine, and memory system make M4 extremely well suited for the latest applications leveraging AI. Altogether, this new chip makes iPad Pro the most powerful device of its kind,” commented Johny Srouji, the company’s Senior VP of Hardware.
Apple’s strides in the AI space are still relatively modest compared to the big leaps that companies like OpenAI, Microsoft (MSFT), and Alphabet – the parent company of Google – have made in the past 15 months or so.
However, the firm has made several acquisitions that could help it bring AI technology to its devices pretty soon. That said, investors seem to perceive that Apple is still lagging behind its competitors in the AI race and that explains why its stock price has performed so poorly this year despite the overall interest that the market has in AI-exposed tech firms.
Although the amount of this latest buyback can be used to draft eye-catching headlines, the program’s size is nothing extraordinary for the Cupertino-based firm considering the pace at which it has been buying back its own stock.
Warren Buffett Trims Apple Exposure by 13%
Notably, the legendary investor Warren Buffett trimmed its exposure to Apple stock by 13% earlier this month after selling $6 billion worth of the tech firm’s shares.
Although Berkshire Hathaway’s Apple holdings are still quite large, the move may indicate that Buffett is cashing out of his position at a point when the firm is struggling to find what the next steps are to keep growing its mammoth-sized business in the wake of the tectonic shifts that the tech industry is experiencing.
Based on Buffett’s methodology and investment approach, companies that spend billions in share buybacks often do this to compensate for a lack of strategic direction. In essence, he thinks they are buying back their shares because they don’t have many options on the table to allocate these excess resources.
From a long-term perspective, which is what has made Buffett famous as an investor, a business that does not have any new profitable projects to invest its money in, is one that is poised to underperform.
Hence, if Apple fails to reveal clear paths to growth in the following quarters, the steep decline that its shares have experienced lately may accelerate as investors like Buffett could further jump off board if the company fails to take the appropriate steps to stay relevant and growing in the current environment.