Why Did Apple Buy Back $14B of Its Own Stock?

Updated from 8:31 a.m. EST to include comments from JPMorgan analyst in the fifteenth paragraph.

NEW YORK (TheStreet) -- Buying back one's own stock is seen as a sign of confidence, a sign that you believe the stock is undervalued. Apple's (AAPL) buyback of $14 billion of its own stock in the past two weeks is more than just a sign of confidence.

In an interview with The Wall Street Journal, Apple CEO Timothy D. Cook said Apple repurchased $14 billion of stock in the past two weeks, noting the company wanted to be "aggressive" and "opportunistic" with the repurchases. Cook said he was surprised by the sharp drop in shares following the company's fiscal first-quarter earnings report. The company beat Wall Street expectations on both the top and bottom line, and sold a record 51 million iPhones in the quarter.

Apple shares were higher in trading on Friday following news of the aggressive repurchases, rising 1.8% to $521.52.

AAPL ChartAAPL data by YCharts


Despite the results, it's quite unusual for a company to spend nearly a third of its domestic cash (Apple had just more than $34 billion in domestic cash at the end of the quarter) on share buybacks, in such a short period of time. I understand being confident, but this is boastful, and perhaps speaks to the fact that Cook is confident about the company's product pipeline. This is almost Jobsian-like boastfulness, except Cook is doing it with cash, whereas former CEO Steve Jobs did it with products.

BTIG analyst Walt Piecyk raised his price target to $552 following the disclosure and raised his fiscal 2014 and fiscal 2015 earnings estimates as a result. He now expects Apple to earn $41.56 and $46 a share in 2014 and 2015, respectively.

Apple has come under pressure from activist investor Carl Icahn, who has asked Apple to substantially increase its buyback program, calling the stock a "no-brainer" on television several times. Icahn owns roughly $3.6 billion worth of Apple stock, and has tweeted that he believes Apple should increase its buyback.

This isn't the first time Apple has come under pressure to do something with its mountain of cash, with Greenlight Capital hedge fund manager David Einhorn being the first in early 2013.

Cupertino, Calif.-based Apple is currently returning $100 billion to shareholders in the form of buybacks and dividends, and the recent purchases are part of that program.

It's quite likely that Apple will update its buyback and dividend program later this year, with Cook mentioning that Apple intends to update the program in either March or April. It's possible that Apple again taps the debt market, such as it did last year when it sold a then record $17 billion worth of debt with various maturities.


It's obvious that Apple is working on new products and services for 2014, with Cook hinting at mobile payments on Apple's most recent earnings call. "The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID," Cook said, referring to the fingerprint sensor on the iPhone 5s. "But we're not limiting ourselves just to that."

There's also the increased speculation Apple is working on an iWatch, with 9to5Mac's Mark Gurman recently pointing out a job posting for a physiologist for help with health and fitness data.

Is Cook so confident that the iWatch and Apple's foray into mobile payments are going to generate enough revenue that Apple is confident in using its exorbitant free cash flow to buy back $14 billion worth of stock in two weeks? It sure looks that way.

JPMorgan analyst Mark Moskowitz notes that while capital-focused investors will "cheer the news of of Apple's buyback bonanza," there are more important issues at hand. The iPhone business is slowing down, with "[t]he last two iPhone launches have not resulted in multi-quarter sales growth spurts as previously seen." It's clear that Apple needs to do something to drive innovation and launch another product or three (whether that's the watch, a television or something that hasn't been speculated on) to drive sales growth.

Morgan Stanley analyst Katy Huberty has said the iWatch could generate $17.5 billion in revenue for Apple, assuming a $299 price point. "Our working assumption is that iWatch will largely be adopted as an accessory device and therefore sold into the existing customer base like the iPad rather than to new customers like the iPod or iPhone," Huberty wrote in a note. "Assuming an ASP of $299 and Apple customer base penetration rate similar to the iPad, we see up to $17.5B of revenue in the first 12 months compared to $12B for the iPad and $2.5B for the iPhone."

Aside from an iWatch, television set, or mobile payments, Apple does have one thing going for it now, according to Moskowtiz-- its recent deal with China Mobile (CHL) and what it means for the future. "The China Mobile launch stands to set the stage for a larger-sized iPhone rollout later this year, which could boost unit sales," Moskowitz wrote in the note. "Another silver lining is that we think Apple's crossover to 64-bit processors, ahead of the competition, could usher in new features, potentially jumpstarting growth in the next 12-18 months."

Investor sentiment surrounding Apple right now is seemingly at an all-time low, with TheStreet's Jim Cramer noting the "jitters are for naught." With Cook, Chief Financial Officer Peter Oppenheimer and his team acting so aggressive, it sends a message to markets that Apple is confident in its future products -- even if Wall Street isn't. 

-- Written by Chris Ciaccia in New York

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