Apple (AAPL) Earnings Announcements Boost Short and Long Term Prospects

The big news coming out of Apple's (AAPL) earnings last night is the record setting, $110 billion stock buyback plan. That, and better than anticipated sales in China, are presumably what is driving the stock higher this morning as I write this.

That is perfectly understandable in terms of the stock’s near term future, but the long-term situation in China is still uncertain and stock buybacks are finite in their impact, even $110 billion ones. There were, however, some  comments by CEO Tim Cook that are getting less publicity but will be much more important for the long-term trajectory of AAPL.

I, like most investors, have decidedly mixed feelings about stock buybacks. On the good side, they are obviously a short-term boon to stockholders. They introduce a massive buyer into the market and tell everyone that in the opinion of those best placed in many ways to evaluate it, a stock is undervalued.

However, they can also be viewed as an admission by a management team that they have no better use for available cash, and can be seen as a retreat from a growth strategy. Also, as critics of buybacks frequently point out, they disproportionately benefit the people who implement them -- namely, the CEO and other officers whose wealth is held largely in a company’s stock.

In this case, though, a buyback, even one this large, makes sense. Apple has so much cash on hand, around $73 billion, and produces so much annual free cash flow, around $86 billion over the last year, that it is not a question of either capex or a buyback. Spending on both is quite possible, and if Tim Cook is to be believed, there has already been significant investment by Apple in an area where many people want to see the company move forward: generative AI.

Cook said in the earnings call that followed the release that there would be news about AI “in the weeks ahead,” which presumably means during the Worldwide Developers Conference in June.

Some analysts have been a bit critical of Apple because some rivals, most notably Samsung, have already incorporated AI into their phones, but that is to misunderstand what Apple is and always has been. They are not typically innovators who rush new technology to market. They didn’t produce the first operating system, or the first smartphone, or the first wearables.

What they did in all of those cases was let others deal with the initial problems that come with any new technology then, when the time was right, produce a better mousetrap that they then sold through unrivaled marketing and brand building. That strategy has served them quite well, as their $2.7 trillion market cap would indicate, so why change now?

Of course, it might be that Apple’s mobile phone AI offering is a flop given that those that have been introduced by others so far have not exactly been blockbusters, but that would fly in the face of the historical evidence.

Based on the big pop in AAPL this morning, investors were reassured by what they heard yesterday, and rightly so. Apple is not a young disruptor anymore, they are a mature company, which has some drawbacks in terms of growth but big advantages in that they can do things others maybe cannot.

When it comes to massive buybacks, they can institute them without necessarily denting investment in their future, and they can take their time about deploying new technology, confident that their incredibly loyal customer base will embrace it when it comes. Those are valuable traits for a company, and even at this morning’s levels, the market is not fully pricing them into AAPL.

*Disclaimer: The author is long AAPL, has been for years, and will be for years to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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