Forget $100 billion buybacks. Apple must make a big AI move to turn its stock around

Apple's stock is down nearly 20% year-to-date, with investors increasingly prioritizing generative AI integration over the company's long-standing reliance on share buybacks for EPS growth. The article argues that Apple's perceived lag in AI, highlighted by an underwhelming WWDC, necessitates a strategic pivot: significantly curtailing its multi-billion dollar buyback program to instead aggressively acquire AI companies and talent. This reallocation, while sacrificing immediate low-single-digit EPS growth from repurchases, is posited to unlock significant multiple expansion and long-term value by signaling a robust commitment to future growth in the critical AI landscape.

Analysis

Apple's stock is underperforming, down nearly 20% year-to-date, as investor sentiment shifts focus from the company's historical reliance on share buybacks to its strategic positioning in generative AI. The long-standing capital allocation strategy, which has reduced the share count by nearly a third over the past decade, is now viewed as a source of diminishing returns; since 2022, the average annual share count reduction has fallen below 3%, providing only a low-single-digit EPS boost that the market no longer rewards. This is compounded by a perception that Apple is lagging in AI innovation, underscored by an underwhelming Worldwide Developers Conference and a piecemeal rollout of its "Apple Intelligence" features. The proposed strategic pivot involves reallocating a significant portion of its $110 billion buyback authorization towards acquiring AI companies and top-tier talent, with AI startup Perplexity, valued at around $14 billion, cited as a potential target. This shift would sacrifice a minor, immediate EPS benefit for the potential of significant P/E multiple expansion, as a robust AI strategy is seen as critical to invigorating long-term growth and countering headwinds such as hardware tariffs and extended product refresh cycles.

Key Decisions for Investors

• Investors should closely monitor Apple's capital allocation for a pivot from share repurchases to strategic AI acquisitions, as such a move would signal a renewed focus on long-term growth and could serve as a significant catalyst for a stock rerating.
• The risk of continued P/E multiple compression remains if Apple fails to deliver a convincing AI strategy, as the market may increasingly price the stock as a mature hardware company rather than a growth innovator.
• Consider that pausing the buyback program is a flexible strategic option for Apple that, unlike a dividend cut, would likely be interpreted by the market as a bullish investment in future growth rather than a sign of financial distress.
• Pay close attention to management's commentary in upcoming earnings calls regarding M&A appetite and the scale of the buyback program, as any change could be a leading indicator of a strategic shift.