Apple and Nvidia have both announced large share buyback programs, and I see one of these artificial intelligence (AI) players as the clear winner in the long term.
Companies sometimes buy back their own stock. Two major artificial intelligence (AI) companies currently buying back their own stock are Apple. (AAPL 0.12%) and Nvidia (NVDA -2.13%). While stock buyback programs are often viewed favorably by investors, I view Apple’s and Nvidia’s respective decisions in a very different light.
Below, I detail why it’s important for investors to pay attention to share buybacks, and explain which AI share buybacks I think are the more attractive opportunities right now.
Why do companies buy back their own shares?
There are several reasons why companies choose stock buybacks. One reason for doing so may be that management believes the current stock price is below its intrinsic value. Additionally, a stock repurchase program may be a better way to create shareholder value than paying dividends. why is that? Now, there are some nuances to share buyback programs that are worth noting.
This means that even if the board approves a share buyback, the company is not required to do so. This means that even if the company ends up not doing any share buybacks or only completing part of its authorized program, investors will be more disappointed than if management suddenly decided to cut the dividend. This means that it is likely to decrease. .
One last important thing to note is that stock buybacks reduce the number of shares outstanding in a company. This can create the illusion that earnings per share (EPS) are growing faster than they actually are. This financial engineering mechanism is especially useful for companies experiencing slowing sales or profit growth. In fact, this is true for Apple as well.
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Share buyback stock to buy: Apple
The first thing to note is that Apple’s revenue and profit growth has been lackluster in recent years. The chart below shows that the company’s revenue and net income have not grown over the past three fiscal years. Despite the discrepancies, Apple’s EPS has continued to trend upward over the same period. This EPS growth is primarily due to continued share buybacks.
AAPL Revenue (Annual) Data by YCharts
You’re probably wondering why I prefer Apple, which hasn’t grown much, over Nvidia, the de facto representative of the AI revolution.
First, Apple’s business has been hit hard in recent years by macroeconomic factors such as high inflation and rising interest rates. It’s no surprise that the average consumer is in no rush to upgrade their expensive iPhone.
However, given that inflation has shown consistent signs of slowing and the Federal Reserve has finally started cutting interest rates, I think consumer spending will start to accelerate.
These macro factors come at an interesting time for Apple, as it just released the new iPhone 16. Additionally, as Apple begins rolling out additional hardware integrated with AI-powered services powered by OpenAI, I’m optimistic about Apple’s next growth story. has arrived.
Last quarter, Apple repurchased $26 billion in stock, bringing the total for the next nine months to a whopping $70 billion. Additionally, in May, Apple’s board approved an additional $110 billion buyback program.
Given that these buybacks coincide with Apple’s long-awaited move into AI, I’m bullish on even better days ahead for shareholders. For these reasons, I think Apple stock is a great buy right now.
Stock buyback stock to avoid now: Nvidia
Look at the slope of Nvidia’s revenue and net income. Basically the opposite of Apple. Nvidia has benefited greatly from the AI movement thanks to its sales of chipsets known as graphics processing units (GPUs), which are used in a variety of generative AI applications.
NVDA Revenue (Quarterly) Data by YCharts
What’s really unique about Nvidia is that its revenue is actually growing faster than its revenue. This means that the current share price is actually lower on a price-to-earnings ratio (P/E) basis than it was a year ago.
NVIDIA’s management may view the stock as undervalued, given its valuation compared to historical levels. This may have influenced the company’s recent $50 billion share buyback program. One very important detail to highlight is that the new buyback program does not have an expiration date.
For me, the biggest drawback to investing in Nvidia stock right now stems from competition. Many of Nvidia’s customers have begun developing their own GPUs to compete more directly with chipmakers and break away from overreliance on the company’s hardware.
It will take time, but I think Nvidia’s pricing power will weaken as more GPUs come to market. As a result, Nvidia’s revenue could slow and its profit margins would take a big hit.
In addition to this, NVIDIA currently has approximately $35 billion in cash and equivalents on its balance sheet, which is less than its authorized share buyback amount of $50 billion. I view Nvidia’s share buybacks as a poor capital allocation strategy in the long term, given that the company’s profitability may well begin to slow.
In some ways, I hope NVIDIA never completes this share buyback (if it ever does) because I think this decision is unwise.
