Apple: Expect Smart Money To Sell The $110 Billion Buyback Euphoria (NASDAQ:AAPL)

Apple (NASDAQ:AAPL) stock surged as much as 7.9% in after-hours trading, following the company’s release of Q2 FY 2024 results: The iPhone-maker delivered a consensus beat against both sales and earnings estimates, while also revealing a record-breaking $110 billion buy-back program. However, the headline numbers cover-up deeply concerning commercial trends: Apple has been a shrinking business in Q2 FY 2024 vs. the same period in 2023, with the company’s most successful product, the iPhone, leading the drop in sales. Meanwhile, the potential for Apple’s growth products, notably the Vision Pro and GenAI opportunities remains clouded, and likely unconvincing. On the buyback program, it is worth pointing out that although the absolute dollar value is eye-watering, its relative impact on Apple’s float is not (<4%). Moreover, pointing at a 26x P/E for AAPL stock, and a close to 5% yield on the 10-year Treasury, the buyback may not be the most efficient use of capital.

For context: Apple’s stock has significantly underperformed the broader U.S. stock market this year. Since the beginning of the year, AAPL shares have dropped by approximately 10%, compared to a 7% gain for the S&P 500 (SP500).

Apple Beats Against Consensus Estimates…

Apple announced its results for the March quarter of 2024 on Thursday, May 2nd, topping Wall Street’s expectations for both revenue and earnings. In the first quarter of the year, the tech giant posted sales of approximately $90.8 billion, down about 5% YoY and compared to estimates at $90.45 billion. On a segment level, products Revenue came in at $66.9 billion (down approximately 10% YoY), while Services revenue was reported at $23.9 billion (up 14% YoY).

Regarding profitability, Apple’s operating margin on a group level increased by about 220 basis points to 46.6%, up from 44.2% in the same period in 2023. The expansion in profitability was mostly driven by positive gross margin leverage in Apple’s Services business, where cost of sales remained flat despite higher revenues. But the Products division also benefitted from lower production/ raw materials costs, according to Apple management commentary. Jumping one level down the income statement, Apple’s operating income for the period was $27.9 billion, down from $28.3 billion one year prior (down 1-2% YoY). After accounting for around $4.3 billion in non-operating and tax expenses, Apple reported a net income of about $23.6 billion, which translates to earnings of $1.53 per share (vs. $1.5 consensus estimates, according to data collected by Refinitiv).

Apple ended the quarter with a robust balance sheet, holding $162.4 billion in cash and cash equivalents, including marketable securities, against $91.9 billion in long-term financial debt.

…But Results Are Unconvincing

Although the headline numbers for Apple’s Q2 FY 2024 call for a beat, there are a few concerns hiding under the hood. To start with, I highlight that Apple’s topline/ earnings beat was mostly due to low analyst confidence, with consensus estimates for sales having dropped 3-4% over the past 3 months leading up to the reporting, according to data collected by Refinitiv. Secondly, while a consensus beat projects strength, investors should not ignore that Apple’s group revenues were actually down 4-5% YoY. On that note, Apple is the only Magnificent Seven stock that has failed to score a 10% topline CAGR since post-COVID – suggesting that Apple’s growth momentum is faltering.

Diving into Apple’s reporting by Product line, I am concerned to note that the iPhone business, which accounts for roughly half of Apple’s revenue, has dropped 10% YoY. Similarly, also the iPad business, as well as the Wearables, Home, and Accessories business reported negative growth YoY. And while the growth in the Services business is encouraging, I suggest that investors should not get too excited about the upside going forward, as Apple’s App Store business, most notably the take-rate, is increasingly under regulatory scrutiny.

Looking to the reminder of 2024, Apple’s core product business likely remains under pressure. In that context, I highlight commentary from Apple CFO Luca Maestri, saying that for the full year he expects only single-digit growth at group level, while double-digit growth for the Services and iPad business. While guidance for the iPhone business has been withheld, solving for an implied growth rate suggests a flattish sales performance over the next few quarters.

On a longer-term perspective, Apple has touted opportunities related to GenAI, but so far, refused to give any insights on the nature and extent of the potential. In that context, Apple’s latest conference call with analysts was no different. Personally, however, I doubt that Apple is a leader in the development and the adoption of GenAi features. In fact, I argue Apple is a laggard. According to reporting from Bloomberg, Apple has been in talks with both Google and OpenAi to power certain Ai features for the iOS operating system. Assuming this is true, it looks like Apple is outsourcing the most strategic, and important tech development over the past two decades to its big-tech competitors.

A Note On The Buybacks

Together with Q2 FY 2024 reporting, Apple announced plans to complete up to $110 billion worth of share buybacks. Regarding this program, it’s important to note that while the total dollar amount might seem significant, its relative effect on Apple’s outstanding shares is modest (less than 4%). Additionally, considering Apple’s stock trades at a 25x price-to-earnings ratio and the 10-year Treasury yield stands at 5%, the buyback might not represent the most efficient allocation of capital.

Investor Takeaway

Apple’s stock surged in after-hours trading following the release of its Q2 FY 2024 results, as the iPhone maker exceeded consensus forecasts for both sales and earnings and announced an unprecedented $110 billion buyback program. Despite these impressive headline figures, underlying commercial trends raise concerns: Apple experienced a decline in its business compared to the same quarter in 2023, with iPhone sales notably decreasing. Additionally, the future of Apple’s potential growth drivers, specifically the Vision Pro and GenAI initiatives, remains uncertain and possibly unconvincing. Regarding the buyback program, although the absolute dollar amount is substantial, its relative impact on Apple’s share float is minimal (less than 4%). Furthermore, with Apple’s stock trading at a 25x price-to-earnings ratio and the 10-year Treasury offering a 5% yield, the buyback might not be the most strategic use of capital. On that note, I argue Apple’s Q2 FY 2024 report was disappointing; and, I expect smart money to take advantage of the price surge, selling into the rally. Until I see a clear growth strategy, with encouraging growth momentum, I remain “Sell rated” on Apple for P/E multiples above 20x (in line with the S&P 500).