Apple announces largest-ever $110B share buyback as iPhone sales drop 10% | Hacker News Reader

Apple announces largest-ever $110B share buyback as iPhone sales drop 10%

cnbc.com

54 pointswslh54 comments

I might be too cynical, but when a company thinks that the best use of its cash is to buyback shares (and not, say, invest in a new product line) then it has reached its limits. It's a sign that the company is no longer engaged in developing new things (which requires cash) and is merely engaged in maintaining an existing business.

Kinda sad to see Apple doing this.

Apple spent $100 billion in R&D over the last five years. They have a stated goal to get to net cash neutral through buybacks, dividends, and investments. They can’t easily pour another $100 billion into R&D in a year and expect to get a good return on that investment.

The idea that they are doing a share buyback and not investing in new product lines is also not well founded. They are almost certainly doing both.

Yeah, good point. I kinda agree that it would be hard for Apple to spend all their vast cash reserves on R&D. But the point still stands that a company has choices about what to spend its money on, and if the best use it has for the money is buying back shares then it's not really innovating any more. Share buybacks are not creating more product lines, or investing in the company's future; they're (literally) shrinking the company. The executive team is saying "the best thing we can think of to spend this money on is shrinking the company". That's not a good sign, even if they are also spending big on R&D.

They're clearly trying. Look at the vast sums put into Vision Pro. Given the ramped down shipments, maybe that entire decade+ R&D effort will end up financially a write-off. Or maybe they can turn it around and with more improvements sales will pick up. That risk is the core of innovation, wouldn't you say?

Vision Pro matured out of R&D, Apple Car got scrapped and written off.

I am sure there is more in the works or in stealth mode (Ai?), but the big R&D projects appear to have been forced to ship or been canncelled.

I suspect Jobs would have been all over AI years ago, while Cook has allowed the grass to grow under Apple's feet.

The car was always a bad idea, and - ironically - always needed strong AI anyway.

Phones are basically pocket internet terminals. The metaphor is about to change to pocket personal assistants. There's going to be an awkward period of chaos where the leading edge tech isn't quite good enough to live up to the expectations, but everyone is going to need and want a strong presence anyway.

We're about to go from a bicycle for the mind to a sports car for the mind. And unlike a bicycle, the sports car is going to have strong ideas of its own about where it wants to go.

The claim that Tim Cook has let the grass grow under their feet with respect to AI doesn’t match history. Tim hired John Giannandrea away from Google six years ago to lead Apple’s machine learning and AI strategy. He reports directly to Tim, an indication of how important Tim viewed this area (most of the rest of Tim’s reports have been at Apple for decades).

Apples Stock price is has pretty much remained flat YTD whereas Google, Meta and Microsoft have ballooned thanks to the AI hype.

> The executive team is saying "the best thing we can think of to spend this money on is shrinking the company". That's not a good sign, even if they are also spending big on R&D.

As an executive, buying back shares makes a lot of sense if you believe that your company is currently undervalued and you have a large cash pile.

Tim Cook seems to be very optimistic about Apple's future [1], so doing a buyback in the current market might be a smart move.

[1] https://finance.yahoo.com/news/apple-ceo-tim-cook-boasts-of-...

But also if you want to buy shares of your own company, you must think that current shares are undervalued. If say you think you are undervalued 10x then it would be no brainer to buy as many shares as you can.

They probably are still innovating but not spending as much on it as the cash they have coming in. There's a lot be said for spending an appropriate amount rather than just tipping in vast excesses of cash because you happen to have it.

I used to be involved in the games industry and some company would have a hit, I think MasterMind was an example, and you'd think they must be rich now but no. The process was lots of money comes in, management think we are geniuses we'll put it all into new products, new stuff flops, cash cow declines, can't pay all the new staff, bankruptcy. There's a lot to be said for keeping the spending down.

The one I would fault them on a bit is security. Nobody is perfect there but imagine if they took even 10% to hire a bunch of top people with the goal of replacing every internet-facing bit of memory unsafe code. That’s a huge project but with their resources you could invest in things like tooling for conversion and analysis, and methodically replace every media codec, parser, etc.

My dude, what do you call the Apple Vision Pro? I don't like the technology or product, but they're LITERALLY making a new product line.

A half-hearted product launch of something even iPhone loyalists didn't buy because it costs 2 months' rent and has no real use case out of the box. Zero buzz online; even Apple appears to have forgotten it, seeding rumours instead of on-device LLMs to get the hype train going again.

The news of production cuts is probably the biggest indicator that this isn't the Apple we know.

I agree with you. In fact I also think Apple has reached its limits in terms of growth, and I think Apple itself thinks the same. Besides buying back shares, Apple has (re-)started paying dividends in 2013. Meta and Alphabet also did starting this year. All the large tech companies began to feel the limit to their growth.

I think it was just the expectation of economy for tech companies to at some point reach profitability and also start giving out money to shareholders.

> Kinda sad to see Apple doing this.

Maybe, but what are the alternatives? Develop yet another device that does pretty much the same thing as all the other devices? Long-shot projects like a car. Or, the worst; buying up other companies and entering other markets for no good reason until it becomes an amorphous conglomerate?

Investors might prefer to take the profits, and do their own investing.

Good question. What are the problems that tech could be solving but isn't? I don't think the answer to that is "nothing".

> Investors might prefer to take the profits, and do their own investing.

Yes, exactly the point; if the investors think their money is better used by other companies to solve those problems, then Apple is recognising that it is no longer the best at doing that. I think that's sad.

Lower prices

If they have more demand than supply then they are not charging a market clearing price, they are charging rent which nobody that believes in efficient market theory should accept

However there are ZERO analysts or economists arguing for that

Funny how that works huh

So you would agree that Apple reached its limits more than a decade ago?

That is an interesting discussion and I think making generalizations work for many companies but Apple is in the top which make it important to analyze them particularly.

If we follow [1] and a monetary policy point of view (even if we are not talking about a central bank) we can say that removing stocks from circulation is a strong and positive measure in favour of the company. The P/E goes down which financially makes Apple, if you trust in them, a good target to buy and hold a position.

[1] https://www.investopedia.com/ask/answers/05/retiredstock.asp

I think it follows from basic corporate economics: growing businesses sell shares to raise capital to spend on growing the business. Over-capitalised businesses buy back shares to soak up excess cash and prop up the share price.

Apple used to be the former, now is the latter. You can argue that this is because it has succeeded beyond all comparisons and so it has more cash than it would ever need to keep growing the business (and I can see that argument has merit). But that doesn't contradict the point that it doesn't have enough good ideas to use its cash on. That the best use of its cash that it can think of is to shrink the business instead of growing it. That might be (as you say) a sound decision based on the economics of the situation and its relation to Wall St. I still think it's sad, because Apple used to be endlessly inventive. There are still problems it could solve, and markets it could address. But it doesn't want to. It wants to give that cash back to investors for them to invest elsewhere.

Can someone explain to me (a person who does not know much about finances) what Apples tactic is with a share buyback? Why do they do this and how does it help them?

Not an expert by any means, but my understanding is that share buybacks basically increase the value of the remaining shares by reducing the total number (it indirectly helps raise the price anyway). It's a way to help elevate the stock and keep investors happy if results are less than stellar...and Apple has cash to burn.

There are two ways companies can provide value to investors through their shares - pay dividends or do buybacks.

Buybacks have tax advantages, which could be another reason Apple opted for it instead of a dividend. https://www.taxpolicycenter.org/sites/default/files/publicat...

I think it boosts share price. Supposed to reduce tax burden vs. just giving investors dividends? With dividends, I think valuation only gets affected if it is done on a regular cadence (so old companies that are cash cows but don't really grow). IBM used to do this crap a lot but also promised a target dividend (back in the 2010s). IBM may have borrowed to pay dividends .. again some kind of financial engineering which may have made sense.

It undilutes the stock, indirectly raising the stock price. I've heard it's like paying a dividend, except taxed differently. So shareholders should be happy, and the executives at the company who are making this decision typically own a bunch of shares as well, so they should make out. If Apple thought they could spend $110B more efficiently, I guess they would. But it's difficult to deploy massive capital.

When a company reaches saturation in their core market and can no longer find new ways of investing free cash flow from the business into new markets that are likely to grow the value of the business greater than their cost of capital it has two options:

1. Pay dividends 2. Buyback shares

Microsoft and now Google started paying dividends. Apple is choosing buybacks.

Both options also mean that these companies have run out of ideas for further growth and are now transitioning into cash cows with reduced future growth prospects.

>have run out of ideas for further growth

That's not true, it's simply means they have more cash then they can invest. Not that they do not invest any more.

They also pay a dividend: https://investor.apple.com/dividend-history/default.aspx

Clarifying, they have run out of ideas for profitable growth net of the cost of capital.

Earnings Per Share (EPS)

When a company buys back it stock, that removes from the market available shares to buy.

a. So now, the companies EPS gets boasted because the total # of shares outstanding is a smaller denominator.

b. Conversely, a lot of tech companies give stock options to employees. This (increases the # of shares) and dilutes the number of shares outstanding which then hurts your EPS.

So it’s also common for a company to offer employee stock options and then perform a stock buyback, to neutralize the EPS swing.

Selling shares trades dilution for cash.

Buying shares trades cash for dilution.

These are simply inverse operations.

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MyCorp has 10 million shares, valued at $10 each, for a market cap of $100m.

Next year, its market cap grows by $15m, resulting in a per-share valuation of $11.50.

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But suppose MyCorp had first done a $5m buyback. Then it would have 9.5 million shares, valued at $10 each, for a market cap of $95m.*

Next year, its market cap grows by $15m, resulting in a per-share valuation of $11.58.

The shareholders' "bet" is that MyCorp would increase its market cap, even it gives up $5m of cash. In this case, the bet paid off.

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* Note that buybacks (and fundraising) change the capitalization but do not immediately raise or lower the value of the stock, in a perfect market. It if it did, it would be hard to buy/sell the stock. Rather, it increases shareholders exposure to rewards/losses later (i.e. the opposite of dilution).

When you have an absolutely massive amount of cash, like Apple, there are near term and long term benefits to a buy back.

Near term, buy backs stabilize your share price. Share price is a major driver of many incentives inside Apple as well as perceptions without.

Long term, Apple is betting their shares will increase in value.

Investors are not rational or accurate in their assessments of a company’s performance (why market “expectations” is the bar, not performance), stock markets are not perfect information systems, and most finance professionals regard stock price as the final say on a company’s performance & value.

Put together, this means a company’s best defense (when as successful as Apple) against being under-priced in the stock market is to buy back their own stock. To do that, you need a massive cash war chest or sources of cash like PE/hedge funds/etc. so far only companies with the first option live very long.

The answer is far simpler and less cynical.

The business has cash saved up. It has 3 options. Give the cash to the business’ owners, spend the cash on improving the business (such as R&D), or keep the cash sitting around.

And businesses often times do all 3 in varying amounts.

However, for a publicly listed business, giving cash to the business’s shareholders is taxable income. An equivalent way to reward shareholders without requiring shareholders to pay tax now is to buy outstanding shares and hence causing the price to go up because the supply of shares relative to demand goes down.

Also, if a publicly listed business awards equity to employees, such as RSUs which tech companies famously do, then buying back shares simply negates the effect of that since giving the employee equity increased the supply of shares relative to demand.

Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.

Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.

Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).

There isn’t any. The poster above you is incorrect.

It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.

Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in.

An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.

The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).

I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.

When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)

I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).

I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).

> thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation)

This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow.

The two effects should cancel each other out.

> not having to pay the employees more cash

I acknowledge there is an effect on employee compensation. How it actually plays out is not a simple linear one though (esp. since the comp decision is made at grant time and the impact is seen a while later with different assumptions). The induced incentives and behavior can be different depending on the model chosen.

> The two effects should cancel each other out.

Not sure the math is as clear cut as canceling each other. Maybe. Probably not.

They have RSUs.

> When you have an absolutely massive amount of cash

Apples cash pile (~70bn) is very diminished from their hoarding / tax dodging days when it was >200bn. This cash is of course offset by ~100bn in debt that they have, most of which was issued at around 2% and when rolled over in the coming years will be reissued at >5%.

Thanks for all the answers!

Sales down, share buyback, next step is a "realignment of resources" within 6-ish months, i.e. layoffs.

[dupe]

Some more discussion on official post: https://news.ycombinator.com/item?id=40241119

When money is expensive to borrow, give it to yourself !!

the money is going to shareholders, i.e the public

Reply on news.ycombinator.com