1 AI Shares to redeem shares to buy Hand Over Fist and 1 to avoid (for now)

From time to time, companies may buy back shares of their own stock. Two top artificial intelligence (AI) players currently buying stocks Apple (AAPL 0.12%) and Nvidia (NVDA -2.13%). While buyback programs are often viewed positively by investors, I see the respective decisions from Apple and Nvidia quite differently.

Below, I’ve broken down why it’s important for investors to pay attention to share buybacks and explain which share buybacks AI sees as the most compelling opportunity right now.

Why do companies buy back shares?

There are several reasons why companies may choose to buy back shares. One reason for doing so could be that management believes the current share price is below its intrinsic value. In addition, buyback programs can be a better way to create shareholder value than paying a dividend. Why is that? Well, stock buyback programs have some nuances that are worth noting.

Namely, even if the board of directors authorizes a buyback, the company is not obligated to do so. This means that if a company doesn’t get to buy back shares at all or completes only part of its authorized program, investors will be less disappointed than if management suddenly decides to cut its dividend. .

One last important detail to note is that buybacks reduce the number of shares outstanding for a company. This can give the illusion that earnings per share (EPS) are growing at a faster rate than they actually are. This financial engineering mechanism can be particularly useful for businesses that are experiencing a decline in sales or an increase in profits. In fact, this is the case with Apple.

Image source: Getty Images.

Share Buyback Stock to Buy: Apple

Let’s get one thing straight: Apple’s revenue and profit growth have been uninspiring for several years. The chart below illustrates the lack of growth between the company’s revenue and net income over the last three fiscal years. Despite the inconsistencies, Apple’s EPS continued to trend upward over the same time period. This increase in EPS is largely attributable to strong buybacks.

AAPL Earnings Data (Annual) by YCharts

You’re probably wondering why I like Apple — a company that isn’t really growing — compared to Nvidia, the factor poster child of the AI ​​revolution.

For starters, Apple’s business has been hit hard by macroeconomic forces such as high inflation and rising interest rates over the past two years. It stands to reason that the average consumer has been in no rush to upgrade their expensive iPhone.

However, I believe consumer spending will begin to accelerate as inflation shows consistent signs of slowing and the Federal Reserve has finally started to cut rates.

These macro factors come at an interesting time for Apple, as the company just launched its new iPhone 16. Additionally, as the company begins to release additional hardware integrated with AI-based services and OpenAI, I am bullish on look at the next narrative of Apple’s growth. arrived.

In the last quarter, Apple bought back $26 billion of shares, bringing its total for the past nine months to $70 billion. Additionally, in May, Apple’s board authorized an additional $110 billion buyback program.

When you factor in the overlap of these buybacks with Apple’s long-awaited plunge into the AI ​​landscape, I’m optimistic that even better days are ahead for shareholders. For these reasons, I think Apple stock is a great buy right now.

Buyback stock to avoid right now: Nvidia

Just look at the slope of the revenue and net income lines for Nvidia. It’s basically the opposite of Apple. Nvidia has been a major beneficiary of the AI ​​movement, largely due to sales of chipsets known as graphics processing units (GPUs), which are used for a variety of generative AI applications.

NVDA Revenue Data (Quarterly) by YCharts

What’s really unique about Nvidia is that its earnings are actually growing faster than its revenue. This means the stock is actually less expensive on a price-to-earnings (P/E) basis today than it was a year ago.

Given its valuation relative to historical levels, Nvidia’s management may view the stock as undervalued. This could be something that influenced its recent $50 billion buyback program. A really important detail to point out is that the new redemption program has no expiration date.

For me, the biggest downside to investing in Nvidia stock right now comes from the competition. Many of Nvidia’s customers are starting to develop their own GPUs in an effort to compete more directly with the chipmaker and move away from an over-reliance on the company’s hardware.

Although it will take some time, I think Nvidia’s pricing power will weaken as more GPUs come to market. In turn, Nvidia’s revenue will decelerate — a dynamic that will likely have a significant impact on profit margins.

On top of that, Nvidia currently boasts about $35 billion in cash and cash equivalents on its balance sheet — less than the $50 billion authorized buyback. Given that there is a good chance that the company’s profitability will begin to decelerate, I see buying back Nvidia as a poor long-term capital allocation strategy.

In a way, I hope Nvidia doesn’t complete this buyback entirely (if at all) because I see this decision as unwise.