Apple Inc. (AAPL) Buyback Frenzy Not A Cure-All

Apple Inc. (AAPL) Buyback Frenzy Not A Cure-All
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JPMorgan analyst Mark Moskowitz has a mixed view for Apple Inc. (NASDAQ:AAPL) as the tech giant goes on a stock buyback bonanza.

Late Thursday, The Wall Street Journal (The Journal) reported details of its recent interview with Apple Inc. (NASDAQ:AAPL) CEO Tim Cook. The Journal article states that Apple repurchased $14 billion of its stock in the past two weeks. While event-driven and capital-focused investors could cheer this news, we have a mixed view. As the smartphone market’s growth arc moderates and the competition narrows the gap, we would prefer to see Apple further boost its investment in new technologies and services through inorganic, as well as organic, means.

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Apple’s stock buyback bonanza

The Journal reports that Apple Inc. (NASDAQ:AAPL) repurchased $14 billion of its stock over the last two weeks in response to the pullback after the disappointing earnings call on January 27. The buyback eclipses the $5 billion increments in each of the prior two quarters. In sum, Apple has repurchased approximately $40 billion of its stock in the last 12 months. Approx. $18 billion remains in the company’s $60 billion buyback authorization.

Expect a buyback update in March or April

The Journal also reports that CEO Tim Cook suggested Apple Inc. (NASDAQ:AAPL) would provide an update on its stock buyback program in March or April. We believe the investor base has increasingly anticipated an expanded buyback program after the disappointing earnings results in late January.

Mixed views on the buyback bonanza

In our view, Apple Inc. (NASDAQ:AAPL) sits on an enviable cash pile, and some of that cash needs to be returned to shareholders over time, which the company already has committed to. We are concerned, however, that Apple’s accelerated stock buyback activity could be in response to some investors focusing too much on capital allocation. We would prefer to see Apple assert a more balanced use of cash, across M&A, stock buybacks, and dividends.

Stock buyback is a not lasting tonic

We think event-driven and capitalfocused investors could cheer the news of Apple Inc. (NASDAQ:AAPL)’s buyback bonanza. However, we do not think this buyback activity overcomes the slowdown in the allimportant iPhone business. The last two iPhone launches have not resulted in multi-quarter sales growth spurts as previously seen. We think this lack of follow-through indicates end users are slowing their refresh rates, and recent technology advancements have not been enough to  change that. This dynamic is the bigger issue, in our view, and likely will remain so after any near-term excitement related to the buyback.

Apple’s 2014 catalysts

Despite our mixed view on the buyback bonanza and the recent earnings disappointment, we think Apple still has 2014 catalysts that could restore meaningful, above-peer revenue growth to the model. The China Mobile launch stands to set the stage for a larger-sized iPhone rollout later this year, which could boost unit sales. Another silver lining is that we think Apple Inc. (NASDAQ:AAPL)’s crossover to 64–bit processors, ahead of the competition, could usher in new features, potentially jumpstarting growth in the next 12-18 months.

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