Tech’s top buybacks matter to investors – here’s why

Tech’s top buybacks matter to investors – here’s why

Big Tech is making big purchases.

Sure, this has been the case for years, but we’re seeing companies like Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), and Nvidia (NVDA) doubling down on refunds, which are when buying company. its own stock, reducing the overall share count. These types of share buybacks are controversial, as they are often reflected positively in earnings per share (EPS) and, therefore, in the company’s stock value.

Critics fear that buybacks, often financed by debt, contribute to financial fragility across markets, although some studies have suggested that the system-wide effects of buybacks are limited. . Meanwhile, proponents will say buyouts are a way to reinvest in their companies, putting extra money to work. President Biden has even announced, levying a new tax on purchases back just this year. While there is limited agreement about the long-term effects of buybacks, how they affect the economy as a whole, and what to do, there are two things. is clear

First, buybacks are extremely common at this point. In 2021, an S&P 500 company bought back $882 billion in stock, breaking records.

Second, Big Tech is a big fan of buybacks. Technology companies account for about 35% of quarterly buyback spending, the largest share of any sector, according to investment research management firm VerityData.

For the second quarter of this year, this is what we’re talking about. Below, for Q2, you’ll see Nvidia’s $3.1 billion buyback, the largest on record, as was Amazon’s $3.3 billion buyback.

Meta’s buybacks in Q2 came in at $5.1 billion – a relatively small number when placed in context with the previous four quarters of $7.1 billion, $14.4 billion, $19.2 billion, and $9.4 billion.

Then, of course, there’s Apple, which had the largest buyback of any company in any sector in Q2 2022 and consistently buys back shares around $21 billion.

“Apple has spent more on buybacks than any US company — probably any company in the world — during our record period, from 2004 to today,” said Ben Silverman, Director of Research at VerityData.

Investors generally like to buy buybacks, as they are seen as increasing EPS and improving shareholder value.

However, as tech companies continue to rapidly buy back shares, investors need to remember that not all buybacks are created equal, Silverman said. This type of share repurchase can absolutely facilitate the stability and long-term growth of a stock — if they are part of a long-term capital expenditure plan. On the other hand, timely purchases in response to stock volatility can not only be viewed poorly, but are often insufficient to stop the bleeding and point to deeper problems within the company.

“Buybacks are not enough to support the market or even an individual stock,” Silverman said. “But [this week’s market volatility] This is an example of buying opportunities for companies if management truly believes that their company’s stock is intrinsically undervalued.”

So what should investors be watching for, and what do we know about who’s doing it right?

First, honesty on the part of management is key, Silverman said. Investors should watch how, and if, management talks about repayments at all in earnings calls and public appearances. Apple, for example, is just about its buybacks at record levels, and has done the same share repurchases over and over again. However, if a company is quietly buying back its shares, that’s when you should be suspicious.

“If management isn’t talking about buybacks on earnings calls or at investor conferences, that’s a possible sign that they don’t see buybacks as an important part of their capital allocation strategy,” said Silverman, who has studied buybacks with almost two decades.

It is not the announcement that matters but the execution.

“Repurchase authorization announcements generate a lot of headlines leading to near-term bumps for stocks but retail investors should focus on the execution of the buyback,” he said.

The logos of tech giants Amazon, Apple, Facebook and Google.  REUTERS/File Photos.

The logos of tech giants Amazon, Apple, Facebook and Google. REUTERS/File Photos.

Going case by case

To tell whether Big Tech’s buybacks are smart—that is, whether they serve a company’s long-term prospects—we have to look at them on a case-by-case basis. There have been some famous bad cases within technology over the last 20 years. For example, Silverman described legacy technology giant IBM (IBM) as “the poster child of bad acquisitions.”

“The company’s overall strategy was closely tied to buybacks in the wake of the Great Recession and a disastrous use of cash in the years ahead, resulting in a negative return for shareholders,” he said.

IBM shares hit record highs in 2012 and 2013, and have been in steady decline since then.

Meanwhile, there are companies like Nvidia, which have bought back their own stock consistently for nearly a decade and a half, between 2004 and 2018. The results speak for themselves in Nvidia’s case. In that time, the company’s stock rose 60X, when management declared in the mid-2000s that their stock was undervalued.

On January 1, 2004, Nvidia was trading at $1.85 a share. By January 1, 2018, the stock was trading at $61.45 per hour. On Friday, Nvidia shares opened at $127.42.

Then, of course, there are those cases where the jury is still out. For example, Facebook owner Meta Platforms (META) bought back $44.8 billion in shares at $330.55 in 2021. Since then, the company’s shares have fallen sharply and opened Friday at $148.05 a share. The company’s “aggressive” stance on buybacks “deserves scrutiny,” Silverman said.

Allie Garfinkle is a senior technology reporter at Yahoo Finance. Follow her on Twitter at @agarfinks.

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