Record tech buyouts matter to investors — here’s why

Big Tech made big buyouts.

Sure, that’s been the case for years, but we’re seeing companies like Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), and Nvidia (NVDA) doubling down on buyouts, i.e. when a company buys its own stock, which reduces the total number of shares. These types of stock buybacks are controversial because they often reflect positively in earnings per share (EPS) and, therefore, in the value of the company’s shares.

Critics worry that buyouts, which are often debt-financed, are contributing to financial fragility in markets, although some studies have suggested that the systemic effects of buyouts are limited. Meanwhile, proponents will say buyouts are a way to reinvest in their businesses, putting extra cash to work. Even President Biden has taken notice, levying a new tax on buyouts this year alone. Although there is little agreement on the long-term effects of takeovers, how they affect the economy as a whole and what should be done, two things are release.

First, buyouts are incredibly common at this point. In 2021, S&P 500 companies repurchased $882 billion in stock, breaking records.

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

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

Meta’s Q2 buyback hit $5.1 billion — a relatively low number when contextualized by the previous four quarters of $7.1 billion, $14.4 billion, $19.2 billion. dollars and $9.4 billion.

Then, of course, there’s Apple, which had the largest buyout of any company in any industry in the second quarter of 2022 and regularly conducts stock buybacks of around $21 billion.

“Apple spent more on buyouts than any company in the United States – probably any company in the world – during our peak period, from 2004 to the present,” said Ben Silverman, director of research at VerityData.

Investors tend to like buyouts on their face, as they are seen to increase EPS and improve shareholder value.

However, as tech companies continue to buy back shares at a rapid pace, investors should remember that not all buybacks are created equal, Silverman said. These types of stock buybacks can absolutely facilitate a stock’s long-term stability and growth – if they’re part of a long-term capital expenditure plan. Opportunistic buybacks in response to stock volatility, on the other hand, can not only look bad, but are often not enough to stop the bleeding while signaling deep problems within the company.

“Buybacks aren’t enough to sustain the market or even an individual stock,” Silverman said. “But [this week’s market volatility] is an example of a buying opportunity for companies if management truly believes their company’s stock is inherently undervalued.”

So what do investors need to watch out for and what do we know who is doing it right?

First, candor from management is essential, Silverman said. Investors should watch how, and whether, management talks about buybacks in earnings calls and public appearances. Apple, for example, is straightforward about its buybacks at its highest levels and has consistently bought back the same shares over and over again. However, if a company is quietly buying back its shares, that’s when you should be most skeptical.

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

It’s not the announcement that counts either, but the execution.

“Redemption clearance announcements generate a lot of headlines that drive short-term upside for stocks, but retail investors should focus on the actual execution of the buyout,” he said.

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

Case by case

To say whether Big Tech takeovers 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 are some notoriously bad cases within tech over the past 20 years. For example, Silverman described legacy technology giant IBM (IBM) as “the poster child of bad buyouts.”

“The company’s overall strategy was intimately linked to buybacks following the Great Recession and this proved to be a disastrous use of cash over the next few years, providing shareholders with a negative return,” he said. declared.

IBM shares were at all-time highs in 2012 and 2013, and have been falling ever since.

Meanwhile, there are companies like Nvidia, which repurchased their own shares consistently for nearly a decade and a half, between 2004 and 2018. The results speak for themselves in Nvidia’s case. Meanwhile, the company’s shares rose 60X, proving management’s claims in the mid-2000s that its stock was deeply undervalued.

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

Then, of course, there are the cases where the jury is still out. For example, Facebook owner Meta Platforms (META) repurchased $44.8 billion worth of shares at $330.55 in 2021. The company’s shares have since been reduced significantly and opened Friday at 148, 05 dollars per share. The company’s “aggressive” stance on buyouts “deserves careful consideration,” Silverman said.

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

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