Is Apple Stock A Buy After Record Stock Buyback Announcement? (2024)

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Apple (AAPL) became the world's first $3 trillion company in 2022. Today, the iPhone maker lags Microsoft (MSFT) as the largest American business—but the gap is getting smaller. In fact, Apple briefly overtook Microsoft on Wednesday morning with a market cap of $3.3 trillion, but Microsoft was back on top by market close. Apple has gained about 23% since early-May, compared to Microsoft's 11% rise.

The boost has been prompted by Apple's recent jaw-dropping share buyback announcement plus a collection of innovative product reveals. Let's break down these factors and their potential outcomes, along with what analysts are saying—so you can decide if the time is right to buy Apple.

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Apple’s Record Stock Buyback Announcement

In early May 2024, Apple announced a share repurchase authorization of $110 billion. The news made headlines because it is the largest share buyback authorization in U.S. history. The iPhone maker previously authorized share repurchases of $90 billion in 2023 and $100 billion in 2018, according to Bloomberg.

To be clear, the $110 billion is a budget for share repurchases, to be used when leadership deems appropriate. It is not an amount that's already been spent nor a guarantee that the money will be spent.

Based on Apple's history, however, investors are optimistic that most of the buyback budget will be consumed. Apple spent more than $20 billion on share repurchases in three of the past four quarters, and a cumulative $81.82 billion over the last year. The company’s track record of directing more than $15 billion quarterly to buybacks dates to 2019.

Potential Impact On AAPL Shareholders

The repurchase authorization announcement drove a same-day gain of 6% for AAPL stock. Investors respond well to these announcements because they signal confidence from management and value in the current stock price.

Companies can deploy excess cash in many ways. The decision to invest in buybacks implies the management team sees upside. The upside can be because gains are on the horizon, the stock is priced efficiently, or both. It's like a “buy” rating from those who are working directly in the business.

Other outcomes can materialize as the company engages in repurchase activity. These include:

Higher EPS and other per-share metrics. Share repurchases reduce the company's outstanding share count. Mathematically that reduction raises earnings per share, cash flow per share and any other per-share metric.
Rising stock price. The stock price can rise after share buybacks for two reasons. One, the repurchases shrink the supply. If demand remains unchanged, the stock price should tick up. And two, increased EPS also encourages a stock price gain. Mathematically if EPS rises and the P/E ratio doesn’t change, the stock price must be higher. Of course, there are no guarantees gains will materialize. Business earnings have many moving parts, and some of them can offset these effects.

There is one more consideration. Despite the mechanics of supply and demand and EPS calculations, some believe share repurchases don't meaningfully benefit shareholders. As an example, a McKinsey analysis shows no correlation between share repurchases and total return to shareholders.

The same report argues for using excess cash to invest at an attractive return on capital instead. This strategy has greater benefits, though the timeline is often longer. The question is: Could Apple be doing more with its money than breaking records on share repurchases?

Analysts’ Opinions And Market Sentiment

Analysts are largely bullish on Apple, and the share repurchase program is not the only factor in play. Apple also made a slew of product announcements on June 10. To isolate the effect of the share repurchase announcement on analysts’ opinions, here are the analyst actions taken in May, before the product updates on June 10:

Apple’s Financial Health And Market Position

Apple’s financial position is strong. The company’s balance sheet as of March 30, lists $66 billion in cash and $130 billion in marketable securities. Apple also produces more than $110 billion in operating cash flow annually. The company has the funding for its lofty share repurchase program plus organic and acquisition-related growth initiatives.

From a market positioning perspective, Apple has a loyal base of customers who tend to use multiple devices, upgrade periodically and spend on ancillary services such as Music and iCloud. According to data from Counterpoint Research, Apple’s flagship product, the iPhone, held a global market share of 16% to 24% between second-quarter 2022 and first-quarter 2024. The variation is largely due to seasonality, with share numbers peaking in the fourth quarter following Apple’s fall product launches. Samsung is the global smartphone leader, however, with a slight edge on the iPhone.

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Potential Future Catalysts

Catalysts that could drive AAPL higher include positive consumer reception of Apple's generative AI strategy, the launch of the iPhone 16 this fall and sustained growth in high-margin Services revenue.

Generative AI

Apple recently announced plans to integrate generative AI features deeply within iPhones, iPads and Macs. The set of AI-powered features includes writing and proofreading tools, image creation functionality, note-taking support and features to prioritize emails and notifications. Users can also search for photos with voice commands. These features are collectively being branded as Apple Intelligence.

Investors responded positively to the Apple Intelligence launch announcement, driving the stock price up 5% in a day. Apple users will provide the more important opinion when fall's launch of macOS Sequoia, iOS 18 and iPadOS 18 brings Apple Intelligence to the masses.

iPhone 16 Launch

The iPhone 16 is expected to launch in fall 2024. New device releases generally boost Apple's revenue, and this one already has some buzz. Apple Intelligence will require at least an iPhone 15 Pro or Pro Max to run. The trendy AI features may prompt users with older phones to clamor for an upgrade.

Growth In Services

Apple earns a gross margin of 73% to 75% on its sold Services from App Store, Music, iCloud, Apple Books and Apple TV. Product gross margins, on the other hand, are about 37%. Additionally, Apple's Service revenue has been growing, while Product revenue has been declining. Investors would love to see more growth in Apple's high-margin business to take up the slack created by sluggish device sales.

Risks And Challenges

All companies have looming risks, and Apple is no exception. The challenges facing Apple involve lackluster reception for Apple Vision Pro, weak iPhone sales in China and growing regulatory pressures.

Apple Vision Pro

Apple Vision Pro is Apple’s augmented-reality headset, which the company is promoting as the start of "spatial computing." The goggle-style headset includes productivity apps like Microsoft Office and Adobe Lightroom.

The Vision Pro launched in the U.S. in February. Reception so far has been unimpressive. One issue is the $3,500 price point. Another is the positioning of the headset as a work device. Early reviewers say it's too heavy, hot and uncomfortable to wear for long stretches.

Apple is pressing forward nonetheless. Preorders for the headset will open in China, Hong Kong, Japan, Singapore, Australia, Canada, France, Germany and the U.K. in June.

iPhone Sales In China

Apple lost its leadership position in the Chinese smartphone market earlier this year. According to Counterpoint research, iPhone shipments in China fell 19% in the first quarter. A slow economy and increased competition from lower-cost brands drove the decline.

Apple has responded by cutting iPhone prices to be more competitive with cheaper brands. That strategy appears to be working for now. CNN has reported a 52% increase in April shipments of foreign-branded smartphones in China, driven primarily by iPhones.

This story may not be over if competing brands join in the price battle. Then Apple may have to choose between further margin degradation and market share losses in an important region.

Regulatory Pressures

Apple is taking heat from regulators in multiple countries for anticompetitive practices related to the App Store and Music, two contributors to Apple's high-margin Services business.

Two sticking points for the App Store are the 30% commission Apple takes from developers and the legacy requirement that apps use Apple's in-app payment system.

In the U.S. and South Korea, Apple has complied with regulatory requests to allow outside payment systems. But the commission still stands. Apple says developers using outside payments will still owe 26% or 27% commission on those sales.

Meanwhile, European Union regulators are trying to encourage competition to the App Store under the Digital Markets Act. And the U.K. recently passed similar legislation called Digital Markets, Competition and Consumers (DMCC) bill. How Apple will navigate these rulesets remains to be seen.

Earlier in 2024, Apple was also fined $1.95 billion by regulators in the European Union for anticompetitive actions in the music streaming space.

Is Apple Stock A Buy?

Apple is a well-run company with loyal customers, a healthy balance sheet and a commitment to returning value to shareholders. There's even an Apple stock dividend in play. Those are features most investors appreciate having in their portfolio.

The big challenge in buying Apple is deciding when to make the trade. There is buzz around the stock now, thanks to the share buyback announcement and the reveal of Apple Intelligence. Unfortunately, the buzz has pushed the stock price higher to consume the upside potential that was available just a few weeks ago.

On the other hand, investors haven't been conservative with respect to AI stocks. The 2024 trajectory for NVDA, one of the best stocks of the year, proves that. So, it's likely Apple has more room to run. In that case, expect the stock to respond well to further launch announcements and the launches of the iPhone 16 and Apple Intelligence this fall.

Bottom Line

There are compelling reasons to invest in Apple now, even after the stock jumped on the news of share repurchases and a generative AI rollout. The regulatory pressures and device sales in China are risks to watch. Neither will bring down the stock soon, but they could impact the long-term outlook.

Frequently Asked Questions (FAQs)

What are the main reasons for Apple’s stock buyback?

Apple’s big share repurchase authorization is likely motivated by the company's strong cash flow, management's optimism about the company's future and the desire to promote investor enthusiasm. Apple generated $110 billion in operating cash flow in the last 12 months, while its stock price ended flat in the year prior to the share repurchase announcement.

How does a stock buyback impact a company’s financials?

Stock buybacks reduce the company's outstanding share count. If all else remains the same, the smaller share count would increase EPS and other per-share metrics

What are the largest risks associated with investing in Apple?

The risks of investing in Apple include slowing device sales due to competition and regulatory challenges that affect its Service revenue.