Shares of Apple (AAPL -0.75%) climbed higher after the iPhone maker announced a huge $110 billion share repurchase program in conjunction with its fiscal second-quarter earnings report. While the stock popped on the news, the question is whether this is the best use of cash for Apple investors over the long run.
Let's look at the company's quarterly results and its buyback plans.
A lackluster second quarter
The most recent quarterly results featured a 4% decline in sales to $90.8 billion.
Product sales were down nearly 10% to $66.9 billion as a segment, with iPhone revenue falling 10% to $46 billion, and iPad sales plunging 17% to $5.6 billion. Wearable and home devices saw a decline of 10% to $7.9 million despite the launch of its newest product, the Vision Pro headset. Mac revenue rose 4% to $7.5 million.
Services was a bright spot, with revenue from this segment climbing 14% to $23.9 billion. The company highlighted strong results from Apple TV+ and Apple Sports.
China remained a trouble spot, with overall sales down 8% to $16.4 billion. But the company said iPhone sales in that country did increase. There were worries that the iPhone has been losing market share in China to local rivals such as Huawei, which has led to discounts there, so this was good news.
Apple sees better days ahead, guiding for third-quarter sales to rise by low single digits despite currency headwinds. It is looking for services revenue to grow at a similar double-digit rate as in the first half of the year, and for iPad sales to rebound and grow by double digits.
Image source: Getty Images.
Historic buyback plan
The second-quarter results did little to excite investors, but the announcement of a $110 billion repurchase plan was met with enthusiasm. It is the company's largest buyback authorization in history, topping a previous $100 billion buyback in 2018.
Apple has already been repurchasing its stock, including $23.5 billion worth in the second quarter. So if it completes its repurchase program over the next year, it will quicken its pace to about $27.5 billion in buybacks per quarter, a 17% increase over its current rate.
But is this the best use of cash for shareholders over the long run? The top two things to consider are whether the company is buying back its stock at an attractive price, and what other opportunities it has with that cash.
As for whether Apple is buying its stock at an attractive price, the answer leans toward no. The stock has seen a lot of expansion in the price-to-earnings (P/E) multiple over the years, especially after the pandemic. The P/E has more than doubled since around 2019, as has its multiple for enterprise value to EBITDA, which takes into account its debt and cash.
Investors have been pushing the stock to higher valuations, while the company's operational performance has not followed. In fact, revenue has not grown through the first six months of its current fiscal year.
AAPL EV to EBITDA data by YCharts; EV = enterprise value; EBITDA = earnings before interest, taxes, depreciation, and amortization.
Given Apple's high valuation multiples compared to before COVID, now might not be the best time to be aggressively buying back its shares.
As for whether management has another good option for that cash, artificial intelligence (AI) is looking to be a generational opportunity to invest in. Other large tech companies including Microsoft, Alphabet, Amazon, and Meta Platforms are investing heavily in this field.
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, nor has it indicated an increase in capital expenditures to help capture this opportunity.
It also seems content to partner with other companies to use their AI technology when it introduces its next mobile operating system. There are reports that the company has been in talks with OpenAI and Alphabet's Google about using their AI chatbot technology.
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. Given the stock's current valuation and its apparent lagging in AI, I think there are better opportunities for investors in the tech space at the moment.
