Apple’s massive $700 billion investment in 2013 can’t solve its biggest problem

For most of the last decade, the tech goliath Apple (AAPL -0.76%) it sat atop Wall Street’s pedestal as the largest and most influential business. It became the first public company to reach $1 trillion in market capitalization in August 2018 and was the first to surpass $3 trillion in June 2023.

While a key investment that is the envy of almost every other public company has played a vital role in its rise, this huge investment is not able to solve what is currently Apple’s biggest problem.

Image source: Apple.

Apple’s $700 billion investment was a godsend for its shareholders

Berkshire Hathaway CEO Warren Buffett made Apple his company’s main holding for good reason. Namely, its true sea of ​​catalysts and competitive advantages.

For example, it is one of the strongest and most recognizable brands in the world. Kantar’s annual “BrandZ Most Valuable Global Brands Report” for 2024 included Apple as the top brand for the third consecutive year. It was the only company to receive a brand value of less than $1 trillion and was praised for having products that warrant a premium price.

Apple’s iPhone is also unmistakably dominant in the U.S. Since the introduction of a 5G-capable version of the iPhone in the fourth quarter of 2020, it has maintained a share of 50% or more of the domestic smartphone market and saw its share of global shipments grow from 12. % in 2020 to 16% by 2023. Historically, there has been a lot of excitement around Apple’s annual iPhone update/reveal.

Investors also buy Apple stock for its innovative capacity, which includes innovations that extend beyond the physical products that initially endeared the company to consumers. CEO Tim Cook is leading a multi-year effort in which his company focuses on growing the Services segment. Subscription services should increase the company’s operating margin over the long term, keep customers loyal to its ecosystem of products and services, and minimize the ebb and flow of revenue associated with iPhone replacement cycles.

But the unmistakable investment that has played the biggest role in Apple’s success is the roughly $700 billion it has committed to share buybacks since the start of 2013. Here’s a breakdown of Apple’s buyback activity over the past 11 years:

• 2013: $22.95 billion in buybacks
• 2014: 45 billion dollars
• 2015: USD 35.253 billion
• 2016: USD 29.722 billion
• 2017: USD 32.9 billion
• 2018: USD 72.738 billion
• 2019: USD 66.897 billion
• 2020: USD 72.358 billion
• 2021: USD 85.971 billion
• 2022: USD 89.402 billion
• 2023: USD 77.55 billion
• Through nine months of fiscal year 2024: USD 69.866 billion

Collectively, Apple has repurchased $700.61 billion of its common stock since the start of 2013 and has reduced its number of shares outstanding by 42.24% since its peak.

In addition to incrementally increasing shareholder ownership and promoting a long-term mindset, share buybacks have a positive impact on earnings per share (EPS). Companies with flat or rising net income and declining share counts tend to enjoy rising EPS, which ultimately makes their shares fundamentally more attractive to value-focused investors such as Warren Buffett.

If Apple hadn’t spent a cent on share buybacks over the past 11 years, its trailing 12-month EPS, which is currently north of $6.50, would be just $3.87. These redemptions were like that vital to the success of his stock.

Unfortunately, Apple’s $700 billion investment can’t solve the biggest problem.

Image source: Getty Images.

Apple’s growth engine has stalled — and that’s a big problem

While buying back large amounts of stock has sometimes helped Apple maintain some semblance of value in the eyes of investors, the company’s growth engine has stalled completely over the past few years. This is a massive problem that buybacks simply won’t fix.

Despite record Services revenue in the fiscal third quarter (ended June 29) and double-digit sales growth in the segment in the first nine months of the current fiscal year, Apple’s physical product segments are struggling.

• The iPhone, which is Apple’s top segment by revenue (52.3% of net sales), experienced a sales decline of about 1% compared to the comparable period last year. Consumers have been unimpressed by the lack of major changes Apple has brought to its latest models and continue to wait for artificial intelligence (AI) to be incorporated into the next-generation iPhone models.
• Although Mac sales were up about 2% year-over-year, they fell by a double-digit percentage last year. The return to the office for working Americans following the COVID-19 pandemic has put a serious damper on PC/laptop demand.
• iPad sales fell nearly 10% in the first nine months of fiscal 2024 to $19.7 billion.
• Apple’s Wearables, Home and Accessories segment, which includes the Apple Watch, has so far experienced a sales decline of more than 8% in fiscal 2024.

Even though Services now account for 24% of net sales and are growing by double digits, Apple’s revenue was up just 1% year-over-year.

Apple’s net income has stagnated in recent years. AAPL Net Income (Annual) Data by YCharts.

While the Services will drive higher operating margin over time, they alone haven’t had enough power to significantly increase Apple’s net income. Here’s a breakdown of Apple’s net income for the first nine months of the past four fiscal years:

• By Q3 2021: USD 74.129 billion
• By Q3 2022: USD 79.082 billion
• Until the third quarter of 2023: USD 74.039 billion
• By Q3 2024: 79 billion dollars (on the nose)

Apple’s net income has gone nowhere in two years and has grown just 6.6% over the past three years. However, this operational weakness was well masked by the company’s stepped-up buyback program. All the while, Apple shares have gained 61% since the end of the third fiscal quarter in 2022, despite a par. decline in his net income.

What makes this lack of growth even more glaring is that it occurred during a time of historically high inflation in the US. A record increase in the US money supply has caused the headline rate of inflation to rise at a rate not seen since the early 1980s. Even with an exceptionally strong brand and pricing power in its sails , Apple’s revenue and profit growth has completely stagnated.

This is a particularly big deal for Apple, as it is currently valued at 31 times next year’s estimated earnings. This represents a 17% premium to its average annual price-earnings multiple over the last hour period.

In other words, Apple is historically expensive at a time when its operating performance is wrong. No amount of stock buybacks is going to fix this.