The record-breaking technology buybacks are important to investors – here’s why:


Big Tech is making big buybacks.

Of course, this has been the case for years, but we’re seeing companies like Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), and Nvidia (NVDA) doubling their buybacks, which is when a company buys its own stock, making the total number of shares is reduced. This type of share buyback is controversial, as they are often positively reflected in earnings per share (EPS) and, consequently, in the value of the company’s stock.

Critics fear that buybacks, often financed by debt, contribute to the financial fragility of the markets, although some research has suggested that the system-wide effects of buybacks are finite. Meanwhile, proponents will say buybacks are a way to reinvest in their business and put extra money to work. Even President Biden has noticed this and has imposed a new tax on buybacks this year. While there is limited agreement on what the long-term effects of buybacks are, how they affect the economy in general, and what needs to be done, there are two things: to be Transparent.

First, buybacks are incredibly common right now. In 2021, S&P 500 companies bought back $882 billion worth of shares, breaking records.

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

We are talking about this for the second quarter of this year. Below, for the second quarter, you can see Nvidia’s $3.1 billion buyback, the largest ever, as was the case for Amazon’s $3.3 billion buyback.

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Meta’s second quarter buybacks were $5.1 billion — a relatively small number when contextualized by 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 clocked the largest buyback of any company in any industry in the second quarter of 2022, consistently repurchasing shares at around $21 billion.

“Apple spent more on buybacks during our record-breaking period, 2004 to date, than any U.S. company — probably any company in the world,” said VerityData Research Director Ben Silverman.

Investors tend to buy back on the face of it, as they are seen as an increase in earnings per share and an improvement in shareholder value.

However, because technology companies are buying back shares at a rapid pace, investors should remember that not all buybacks are created equal, Silverman said. This kind of share buyback can definitely facilitate a stock’s stability and long-term growth — if they’re part of a long-term investment 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 also pointing to deep problems within the company.

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

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So, what should investors look out for and what do we know about who is doing it correctly?

First, management candor is key, Silverman said. Investors should pay attention to how and whether management talks about buybacks at earnings calls and public appearances. For example, Apple is direct about its top-level buybacks and has consistently repurchased the same stock over and over. However, if a company is quietly buying back its shares, you should be highly skeptical.

“If management isn’t talking about buybacks on earnings calls or at investor conferences, that’s a potential sign that they’re not seeing buybacks as an important part of their capital allocation strategy,” said Silverman, who has been involved in buybacks for nearly two decades.

It is also not the announcement that counts, but the execution.

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

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

Going case by case

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

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“The company’s overall strategy was closely tied to buybacks in the wake of the Great Recession and it proved to be a disastrous use of cash over the next few years, leaving shareholders with negative returns,” he said.

IBM shares were at their all-time highs in 2012 and 2013 and have fallen steadily since.

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

On January 1, 2004, Nvidia was trading at $1.85 per share. On 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 those cases where the jury is still out. For example, Facebook owner Meta Platforms (META) bought back $44.8 billion worth of shares in 2021 for $330.55. Since then, the company’s stock has taken a significant beating, opening Friday at $148.05 a share. The company’s “aggressive” stance when it comes to buybacks “deserves close scrutiny,” Silverman said.

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

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