By Chand Bellur
June 11, 2020 at 4:25 p.m. PT
- Apple’s stock is at record highs while the nation is in crisis, and the economy is in recession.
- Apple CFO Luca Maestri’s plan to buyback stock boosts its value, indicating that it’s the best use of their cash at this time.
- The Cupertino company still seems to lack innovation, pivoting to unoriginal services such as video streaming and online gaming, to make up for declines in iPhone sales.
Apple Stock Hits Record Highs, Buoyed by Buybacks
This has been one of the most challenging times in modern society. Between a pandemic, race riots, and record unemployment, some may wonder why the stock market is still thriving. Although today saw a massive decline in stock values, some corporations seem to be immune to sinking share prices.
Stock buybacks are one of the main reasons why the stock market is so strong. In January 2018, the corporate tax rate dropped from 35% to 21%. The issue received bi-partisan support. Although Donald Trump championed the policy, Barack Obama considered reducing corporate tax rates during his administration.
While it’s true that the US had one of the highest corporate tax rates in the world, corporations also enjoy many tax loopholes. It’s no secret that the most prominent corporations pay very little in taxes. They’ve also been hoarding cash offshore, ensuring that they contribute even less.
By lowering the corporate tax rate, companies are repatriating overseas money. Given the state of the economy and record low consumer confidence, instead of investing in new products or research and development, corporations are buying back their own stock. This keeps stock prices stable as many Americans are figuring out how to pay their mortgages and rents.
Apple Produced Revenue Gains in Troubled Times
Despite global events, Apple does have solid fundamentals justifying their stock price to some extent. Although today’s $335 price is the result of stock buybacks, the company does deserve to see some gains.
In the last quarterly conference call, Apple revealed that they managed to grow revenues during one of the most troubled times in American history. By growing services, they were able to offset declines in iPhone sales and increase monthly service subscribers. The fact that most of America was under stay-at-home orders also helped to drive Apple services.
Unfortunately, Apple’s Q2 gains over 2019 were not astronomical; however, their stock value is. Apple stock isn’t being bought up mostly by individual investors. The company is buying up billions of dollars worth of its shares every quarter.
By buying back its stock, Apple elevated the company to new heights, but it can’t go on forever. Apple’s overseas cash is limited, and there are only so many outstanding shares. Furthermore, every dollar spent on stock buybacks is one less spent on innovation.
If Apple doesn’t produce another blockbuster product like the iPhone, it will face another dilemma as services reach market saturation. To grow the stock price, Apple must increase revenues and profits every quarter.
Stock Buybacks Compromise Innovation
There’s an opportunity cost to stock buybacks. Instead of buying back its stock, Apple could have dramatically increased its R&D budget.
Let’s face it. The iPhone is old. It debuted almost 15 years ago, and Apple has yet to launch another blockbuster product. iPhone sales dwindle as users are more reluctant to upgrade. Not everyone needs a new and improved camera every year, which seems to be the main focus as Apple desperately tries to appeal to Millennials’ social media narcissism.
Apple has released some impressive products after the iPhone. The Apple Watch and AirPods are the most successful wearables, outpacing competitors, and gobbling up market share. The problem is that these are not anything as game-changing as the iPhone. Apple needs another game-changing product to keep that stock price high.
Apple’s ability to grow services helped offset declines in iPhone sales. Services like Apple TV+, Apple Arcade, and Apple News+ are nothing special, however. Apple’s video streaming efforts are unoriginal, coming some 15 years after Netflix and HBO entered the fray.
Given Apple’s product releases, some investors and consumers wonder if the company can innovate as they did under Steve Jobs. Devices such as the iPad and Apple Watch are, fundamentally, differently sized iPhones with similar software. They’re hardly breakthrough products in the way that the iPhone was.
Rumors suggest that Apple is developing AR glasses expected to debut in 2021 or 2022. Although the features are unclear, Apple analysts feel that this may be the next iPhone.
Regardless of the rumors, Apple’s current action is to buy back stock to keep the price afloat. It’s a great short-term strategy; however, it sacrifices Apple’s future. The company could have invested this money in R&D and hiring. Indeed, this was the supposed benefit of lowering corporate taxes. In theory, corporations would expand and hire more Americans. Critics pointed out that, with previous “tax holidays”, corporations used the money to repurchase shares. It would appear that an enduring decrease in corporate taxes produces the same result.