It’s a good time to be a bull on Wall Street. Since the start of 2023, the mature stock-driven Dow Jones Industrial Average, broad-based S&P 500, and growth-inspired Nasdaq Composite have respectively soared by 34%, 59%, and 91%, as of the closing bell on Jan. 24, 2025.
Investors haven’t hurt for catalysts, with a softening in the prevailing rate of inflation, better-than-expected corporate earnings, and Donald Trump’s return to the White House helping to lift equities. But topping the list of factors that have sparked this bull market rally is the ascension of artificial intelligence (AI).
Image source: Apple.
Although many of Wall Street’s most-influential businesses have leaned on AI as a way to fuel their growth, one of Wall Street’s biggest businesses, tech giant Apple (AAPL 2.74%), has put $725 billion to work elsewhere to boost its bottom line.
Apple is one of Wall Street’s largest businesses for a reason (and AI is part of it)
Apple was the very first public company to top $3 trillion in market value, and as of this past weekend was the second-largest company, behind only Nvidia (NVDA -14.89%). Apple has consistently led Wall Street higher for years -- and its success is no accident.
For starters, the iPhone is the premier smartphone domestically. Since rolling out the first 5G-capable iPhone during the fourth quarter of 2020, Apple’s share of domestic smartphone sales has been 50% or higher. The ongoing upgrade of wireless networks to support 5G download speeds has led to relatively consistent demand for the company’s iPhone.
Apple’s innovation has also played a key role in sending its market cap to north of $3 trillion. This innovation includes physical products, such as the iPhone, iPad, and Apple Watch, as well as its ongoing transformation into a platforms company.
For years, CEO Tim Cook has overseen the push to promote subscription services. By focusing on subscriptions, Apple has an opportunity to lift its operating margin, improve its already impressive customer loyalty, and smooth out the revenue peaks and valleys that often accompany major iPhone upgrade cycles. Apple’s Services segment has been consistently growing by a double-digit percentage and now accounts for around a quarter of the company’s net sales.
Like most tech stocks, Apple is betting big on AI to power its top-and-bottom-line growth. Last year, the company introduced Apple Intelligence, which is its AI-driven personal intelligence model for iPhone, iPad, and Mac. Apple Intelligence can do everything from write and summarize text to create images for users.
Lastly, Apple’s balance sheet is cash rich, which allows it to aggressively invest in its future.
Image source: Getty Images.
This $725 billion investment has been crucial to Apple’s profit growth
While this confluence of factors has helped Apple become the company it is today, arguably the greatest driver of Apple’s growth in earnings per share (EPS) hasn’t been mentioned yet. I’m talking about Apple’s single greatest investment: stock repurchases.
In 2013, Apple’s board kicked off a share buyback program that quickly became the envy of the investing word. Here’s a breakdown of Apple’s repurchasing activity in each of its last 11 fiscal years (its fiscal year typically ends in late September):
- 2013: $22.95 billion in buybacks
- 2014: $45 billion
- 2015: $35.253 billion
- 2016: $29.722 billion
- 2017: $32.9 billion
- 2018: $72.738 billion
- 2019: $66.897 billion
- 2020: $72.358 billion
- 2021: $85.971 billion
- 2022: $89.402 billion
- 2023: $77.55 billion
- 2024: $94.949 billion
Collectively, Apple has bought back $725.69 billion of its shares spanning 11 years and reduced its outstanding share count by almost 43% in the process. To put this into some context, the $6.08 in EPS Apple reported in fiscal 2024 would have equated to just $3.47 in EPS if the board hadn’t authorized any share buybacks.
AAPL Shares Outstanding data by YCharts.
An ongoing share repurchase program serves a number of purposes for Apple. For one, as noted, it reduces the company’s outstanding share count, which can increase EPS and make the company’s stock more fundamentally attractive to investors.
Secondly, buyback programs tend to incentivize long-term investing. When a company’s outstanding share count declines by a considerable amount over time, it incrementally increases the ownership stakes of investors. When investors buy and hold, it typically reduces share price volatility, which can also make a stock more attractive to investors.
And third, buybacks intimate that Apple’s insiders (the board and management team) believe shares of their company remain attractively valued.
Not even Apple’s world-leading buyback program can mask these issues
With more cash than Apple knows what to do with on its balance sheet (and generated from its operations), there’s no end in sight to this world-leading buyback program.
But just because Apple is buying back its shares at a breakneck pace, it doesn’t necessarily mean its stock is a good value. Billionaire Warren Buffett has sold 67% of Berkshire Hathaway’s (BRK.A 1.31%) (BRK.B 1.25%) stake in its top holding, Apple, over the trailing year (ended Sept. 30) -- and there are two good reasons why this selling is likely taking place.
AAPL Revenue (Annual) data by YCharts.
First off, Apple’s physical product sales have stalled out for two years. Even though iPhone remains the top-selling smartphone in the U.S., stagnant sales of iPhone, iPad, Mac, and other wearables suggest consumers aren’t being wowed by the company’s physical products in the same way they have in the past. Though it’s possible the incorporation of Apple Intelligence into iPhone, iPad, and Mac will turn these fortunes around, not even historically high inflation helped Apple grow sales of its physical product lines in fiscal 2023.
The other prominent concern with Apple is that its stock is historically pricey. Despite its aggressive share buybacks, Apple recently hit a price-to-earnings (P/E) ratio of more than 42, which is a level that hasn’t been witnessed in 17 years. The stock market is itself pushing the envelope on the valuation front, and Apple’s premium is even more pronounced.
Though Apple’s share repurchases are bound to continue, there’s a lot of work to be done with the company’s physical products before its current valuation makes sense.
