When Apple (NASDAQ: AAPL) reported its financial results on May 1, the company announced that it had authorized a new $100 billion stock repurchase program. This move wasn’t entirely unexpected, particularly given that Apple executives are on record in saying that the company’s goal is to achieve a net cash neutral state. On top of that, Apple’s expects to complete its older $210 billion share repurchase program in the current quarter, so Apple was bound to authorize a new one.
While the magnitude of this share repurchase program certainly seems to be driving a lot of enthusiasm among both investors and analysts alike, here’s why — as somebody who regularly considers personally investing in Apple — I’m not excited by it.
Image source: Apple.
Share buybacks are financial engineering
When I buy shares in a company, it’s because I believe that the company’s fundamental business performance is set to improve. This means that I have a lot of confidence that the company’s revenue and operating income are set to grow significantly and consistency.
Stock buybacks don’t impact a company’s fundamental business performance one bit. What they do is they, ideally, reduce the number of shares outstanding which boosts earnings per share (since the company’s net income is split between fewer shares).
Stock buybacks also introduce demand for a company’s shares. Since a company’s stock price is governed by supply and demand, increasing demand for a fixed level of supply should, in theory, push the share price up higher.
There’s no denying that stock buybacks can be good for amplifying earnings per share as well as market demand for the stock, but I view these as nice perks — they’re not going to affect my decision to buy or sell a stock.
Here’s what concerns me
Apple is a highly successful business that generates a tremendous amount of revenue and profits each year, but there’s a potential crack in its armor that Apple’s large share repurchase program can’t distract me from.
A large percentage of Apple’s revenue — nearly 62% during fiscal year 2017 — comes from sales of smartphones. Apple faces two major risks from that high dependence on the iPhone. The first is that the overall smartphone market seems to be contracting (IDC says that worldwide smartphone shipments dipped 2.9% in the fourth quarter of 2017), and the second is that the company faces increasing competitive pressure.
During the first half of its current fiscal year, Apple seemed to manage both of these risks deftly, with unit shipments staying roughly flat in a slightly declining market and revenue growing by 14% thanks to significant iPhone average selling price increases. However, Apple’s financial guidance for its coming quarter seems to indicate that iPhone unit shipments will be flat to slightly down, with any iPhone revenue growth coming from the average selling price bump.
The main concern I have over the long term is the sustainability of iPhone revenue growth for Apple. Can it continue to drive enough average selling price or unit growth to push overall revenue up in the years ahead? I think that Apple’s upcoming iPhone product cycle — which, frankly, should consist of much more competitive devices than the current cycle did as the company patches obvious competitive gaps — will go well, but things look really murky beyond that.
Apple can, of course, look to other segments for revenue and profit growth like its services business (a segment that’s Apple’s second-largest by revenue and grew by 31% last quarter) and even its “other products” business, which consists of the Apple Watch, accessories, and other such products, which saw 38% year-over-year revenue growth last quarter.
However, if Apple’s iPhone business ultimately stops growing or even starts suffering from mild annual revenue declines (something that happened during the iPhone 6s product cycle and could happen again), then the growth in these other businesses could mean that Apple’s business as a whole — and, potentially, its stock price — will stagnate. A stagnant technology company is hardly the best place an investor can put their cash.
It all comes down to this for me: If I can gain confidence that Apple’s iPhone business has many years of reasonable revenue growth ahead of it, then I’d probably be willing to hop on board for the long term. If I can’t get that confidence, then a $100 billion or even a $200 billion stock buyback won’t be enough to get me interested in the stock.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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