To The Moon

With its shares down over 10% this year, and iPhone sales down as well, $Apple(AAPL)$ big plan to restore investor confidence is a $110 billion stock buyback and a 4% dividend increase.

We know that Apple have been facing challenges before its earnings, so will this stock buyback win back investors confidence for its stock price? In this article I would like to share the pro and con of stock buyback and how Apple stock would move based on Technical Analysis (TA)?

Key Challenges Apple Faced Around The World Now

European Union Digital Markets Act

EU’s Digital Markets Act takes effect in March 2024 in a new threat to Apple’s “walled garden”, the ecosystem that encourages Apple hardware users to buy other Apple products and services. The EU also hit Apple this week with a 1.8 billion euros (S$2.6 billion) penalty over an investigation into allegations that it hampered music-streaming rivals, including Spotify Technology.

China Slowdown

The sales slowdown in China have been bothering Apple, the iPhone’s sales in the country fell by a surprising 24 per cent during the first six weeks of this year, This figure will be higher as the entire smartphone market in China has been declining, but Apple is now sliding faster than local competitors. Vivo, based in the Chinese industrial city of Dongguan, has emerged as the country’s leading supplier.

Too Late Into AI

On top of this, Apple is quite conspicuously absent from this AI frenzy, raising concerns that it is falling behind in a vital new area. Even the news of integration of Gemini into its phone does not seem to create big splash to its stock price when the announcement was made.

So why do Apple make the Stock Buybacks now?

If we looked solely on the corporate finance, stock buybacks have emerged as a strategic tool utilized by companies to manage their capital structure and enhance shareholder value. But what is Apple motivation and implications amid the challenges it is facing?

Boosting Shareholder Value

If we look at the 10% loss so far on stock value, one of the primary reasons companies engage in stock buybacks is to bolster shareholder value. By repurchasing their own shares from the market, companies reduce the total number of outstanding shares.

This reduction effectively increases the ownership stake of existing shareholders in the company, leading to higher earnings per share (EPS) and potentially driving up the stock price. For shareholders, this means a direct increase in the value of their investment.

Capital Allocation Efficiency

Another rationale behind stock buybacks lies in optimizing capital allocation. When a company finds itself with excess cash reserves, it faces a decision on how best to utilize these funds. Options may include reinvesting in the business through research and development, expanding operations, pursuing acquisitions, paying dividends, or repaying debt. Stock buybacks offer an avenue to deploy surplus capital when other investment opportunities may be limited or less attractive.

The free cash flow cagr for Apple (AAPL) stock is 9.64% over the past 12 months. The 3 year average growth rate is 10% and the 5 year cagr is 11.45%.

Mitigating Dilution

Stock options, employee stock purchase plans, and convertible securities are common tools used by companies to incentivize and retain talent or raise capital.

However, these instruments can dilute existing shareholders' ownership stakes if not managed carefully. Apple might be trying to offset the dilutive effect of these programs, maintaining the proportional ownership of shareholders and preserving their share of future earnings by doing the stock buyback.

Signaling Confidence

Stock buybacks can also serve as a signal of management’s confidence in the company's prospects. When a company announces a buyback program, it demonstrates that it believes its stock is undervalued. Such confidence can influence investor sentiment positively, potentially attracting new investors and boosting the stock price.

If we looked at the estimated intrinsic value, market actually think that it is overvalued, so the stock buyback to act as a signal of confidence might not work for Apple.

Apple Trading Between $165 to $173 For Almost 2 Months

When we looked closely to how Apple have been trading over the past weeks or months, we can noticed that it is trading within a very short range ($165 to $173), so earnings is not anticipated, but maybe outlook guidance and next quarter forecast.

But the only demand (buying) we are seeing it days closer to its earnings release, but after that, it went down with very little buying strength. So in order to really see whether the market respond well with the stock buyback, we will need Apple to show us higher demand (buying).

I believe the price will follow if that happen, do note that Apple has a 6% gains in after hours trading after it announced the stock buyback.

Summary

Despite the perceived benefits, stock buybacks are not without criticism. Critics argue that buybacks prioritize short-term gains over long-term growth and innovation. This might not sit well with Apple, as Apple investors are mostly long-term growth.

With their AI strategy announced to have Gemini on the phones, this actually defies the allocation of capital for investment in research and development or capital expenditures, unless Apple has already allocate the funds for that.

So what I would think is stock buyback can signal confidence and provide tax-efficient returns to investors, buybacks also attract scrutiny regarding their impact on long-term growth and financial market dynamics.

Appreciate if you could share your thoughts in the comment section whether you think market would react positively to Apple’s stock buyout or investors rather Apple to focus on AI strategy?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.