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Apple's Fumble: Stock Buybacks Before Innovation

Posted on March 25, 2016

Since its creation in a garage in 1976, Apple Computer has been nearly synonymous with the word “innovation.” From the introduction of the graphical user interface (GUI) to the general public to the blockbuster success of the iPhone, the company has long set the pace for other tech companies to follow.

This drive to innovate has produced spectacular results. In 2014, Apple became the first U.S. company to be valued at over $700 billion and, with revenue of $233 billion in 2015, is the largest information technology company in the world.

But is Apple’s reputation for innovation at risk? It appears to be so with recent stumbles. Shares in Apple have fallen 20% in the past six months, allowing Alphabet, Google’s parent company, to claim the mantle of world’s most valuable company.

Further, as sales of the blockbuster iPhone inevitably drift downward from their current state of absolutely insane to merely phenomenal, what’s next? Sales and early reviews of the Apple Watch have been tepid and the new product pipeline is surprisingly lacking.

The Folly of Investing in Stock Buybacks

Part of this misstep may be due to the massive stock repurchase campaign Apple engaged in from September 2013 to the end of 2015. During this time frame, the company bought back 12% of all outstanding shares, around 760 million of them, at a total cost of $87.2 billion.

In so doing, Apple appears to have gone against the fundamental investor wisdom of “Buy low, sell high.” Apple paid an average of $115 per share during this two year program and the stock now sells at $95, a loss of 21%.

Further, what does Apple have to show for all this spending? As Jack Ciesielski, author of the Analysts’ Accounting Observer, observes, “…buybacks send a message of fatigue, that management doesn’t have any good ideas for using the cash, other than giving it back to shareholders.” With a dearth of new products on the horizon, Apple’s stock buyback program could be viewed as a massive cash giveaway to investors which came at a cost of not investing in innovation.

Apple’s Stumble is Google’s Gain

This is made all the more glaring with rival Google’s surge. At the same time Apple was buying shares in itself at an all-time high price, Google was busy expanding from its flagship search service to develop a wide range of new products from internet service to self-driving cars.

While Apple still ranks highly on the innovation list at #18, it’s R&D budget is a miserly 3% of it’s total revenue. Google, in contrast, is reaping the rewards of investing almost 15% of its revenue on developing the next round of products.

Even Samsung, with a fraction of Apple’s revenue, spends more than double the amount on R&D as Apple - $14 billion to $6 billion. If one wonders where the next generation of blockbuster products is going to come from, they should be looking to Samsung.

Perhaps Google’s chief social evangelist Gopi Kallayil was right when he said one of the secrets behind innovating was “Focus on the User.” In Apple’s case, he might have added, “NOT the Investor.”

Apple’s stumble should make clear that innovation is a continuous and constant process and one is not simply complete at any point. Additionally, as Kallayil notes in his nine principles of innovation, these breakthroughs can come from anywhere, equally from the top and from the bottom. Vocoli employee suggestion software is designed to foster and encourage this type of innovation within any organization. If your company is ready to foster new ideas and a culture of constant innovation, contact us for a free demo.

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