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Microsoft (NASDAQ: MSFT) announced on 15/09/2021 that it would spend US $60 billion buying its own stock. As of writing, MSFT is trading at US ~$300.00 per share, which means Microsoft will be buying approximately 200 million shares and removing them from public circulation. Indeed, 200 million is only 2% of the total 7.51 billion MSFT shares available. As such, immediately after the announcement on Wednesday, MSFT share price rose a corresponding percentage.

Microsoft is far from the only company that participates in stock buybacks. In fact, they have become a relatively common occurrence over the past decade and are increasing in popularity. Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOGL) have all purchased back large swaths of their own stock in the past few years. Apple has been one of the most aggressive in this respect, buying shares of AAPL at a total cost of US $77 billion since 2019.

Why would a company buy back its own stock?

stock buyback index

Stock Buybacks Keeps Shareholder Happy

For one, stock buybacks allow companies an easy path to increase shareholder value. If a company is to invest the money in Research and Development, there is no guarantee that a new product or service will eventuate, improving the company's performance. Stock buybacks are a relatively risk-free method to keep shareholders happy.

Think of it this way: Imagine there are 1 million public shares of Company XYZ. Each share is currently worth US $1,000. In this example, Company XYZ would have a market capitalisation of US$1 billion (share price x total number of shares).

Company XYZ then proceeds to repurchase half the number of public shares via a share repurchase plan and removes them from general circulation (imagine that these shares are burnt and no longer exist). Consequently, there are now only 500,000 shares left to be traded or held by the public.

After this event, What will happen to the per-share price? The company's market capitalisation hasn't changed, as the business fundamentals are irrelevant to the share repurchase. The company should still be worth the same $1 billion value. Thus, each share should now be worth US $2,000, and shareholder value has increased 100%.

Increase Dividends < Stock Buybacks?

Buying back stock is a more straightforward and sustainable way to return value to investors than increasing dividend payments. Stock buybacks are more sustainable as there is no expectation for them to continue every quarter. Whereas a dividend payment, inflated in one quarter with cash on hand, may put a strain on cash reserves/flow in future quarters and ultimately putting off investors when the dividend is revised down.

Removing shares from circulation via share purchase plans also reduces the company's long-term cost of equity. Essentially, the fewer shares there are, the less money a company has to pay out in dividends moving forward.

Shattering The Altruistic Illusion Of Stock Buybacks

Stock buybacks are not just for the good of public shareholders. Many publicly listed companies' top brass benefit from the increased stock price value, directly and indirectly.

Directly, company directors and such will most likely hold stock or stock options of the company for which they work.

Indirectly, the remuneration received by some company executives can be determined by the increase or decrease of the company's stock price during their directorships. For example, Apple's CEO, Tim Cook was paid a bonus of US $750 million in August 2021, in part, for APPL shares rising 190% since mid-2018, while outperforming the S&P 500 index. The performance of AAPL certainly owes a great deal of gratitude to the more than US $77 billion in stock buybacks that Apple made over this time.

With Monday earning reports out of the way, it is now time to turn our attention to the reports due Tuesday. Interestingly, Half of FAANG are releasing earnings reports today. For this reason, expect a hyperactive NASDAQ during the Tuesday session.

Let's start with Apple Inc (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT)

The two largest companies in the US, APPL and MSFT, are reporting one after another on Tuesday.

The Market Analyst seated to the left of me, Pavan Sharma, from the equities research arm of BlackBull Markets (check them out for astute stock picks), shared the following interesting graphic from 2020 with me that demonstrates the enormity of Apple.

airpods

This graphic begs the question; how many Air pods did Apple sell in Q3 2021, and how much this device contributes to the Company's Q3 revenue?

Revenue for Apple is anticipated to be US $73B, up by more than US $10B over the PCP. Air pods might be a smaller portion of the Company's Q3 revenue depending on how well the iPhone 12 has sold in the quarter and whether Apple has experienced any Air pod supply constraints.

When it comes to Microsoft, investors will want to see if it has maintained its cloud service revenue growth. Cloud is now the software Company's most significant revenue stream and should hopefully account for more than US $14B of the US $44B expected revenue for the quarter. Microsoft's past success in cloud computing might be its downfall this quarter. Maintaining a 25% YoY growth in its cloud division is a big ask.

As an aside, BlackBull Markets research arm's top tech pick is Apple for several reasons. The main reason being its strong brand presence and ability to make healthy margins on its wide variety of products and services with strong growth potential anticipated on new products and services as well - particularly digital services complementary to its core business. Apple also has a solid balance sheet with ~$196 billion in cash, which can be deployed to reinvest in new offerings or acquisitions, and on traditional valuation metrics is more attractively priced than its mega-cap peers with a solid history of paying a growing dividend.

APPL and MFT earning reports will drop after the closing bell on Tuesday.

Mattel (NASDAQ: MAT) likely to surprise

Because I covered Hasbro (NASDAQ: HAS) yesterday, I want to cover Mattel, another big toymaker, today.

Mattel EPS

Mattel has made a habit of making pessimistic projections, whether underselling their projected profits or overselling their projected losses. For this reason, the Company's actual earnings-per-share are likely to surprise the market when Mattel releases its earnings report after Tuesday trading concludes.

Mattel's earnings for its Q2 operation is expected to be slightly above USD 900M, up 23% from the PCP when it was contending with the Covid-related closure of many of its retail partners.

Other earning reports to watch Tuesday:

Yeah the FOMC kept rates as is…But have you seen GameStop?

While the world continues to grapple with the Coronavirus, the financial markets are captivated by the financial phenomena that are GameStop. Currently, the stock price sits at $255, but by the time this is posted, the price will likely be plus or minus $50. Lawsuits have been served to Robinhood in New York and Chicago due to the low-cost brokerage withholding the ability to purchase more stocks of GME. Sources have stated that Robinhood is currently drawing millions from credit lines from Goldman Sachs and JP Morgan Chase.

"What is GameStops's Price now?" - Yes.

It is incredible how captivated the financial community and even main street on what is currently happening with GameStop. Yesterday, we had the titans on the equity markets releasing earnings. Apple, and Tesla. We also had the FOMC releasing their interest rate decision, alongside Federal Reserve Chairman Jerome Powell releasing his views on the economy, but everyone was too focused on GameStop.

What you missed - Federal Reserve Keeps Rates Unchanged

The Federal Reserve keeps rates unchanged as Jerome Powell believes that "its going to be a struggle "the pandemic still provides considerable downside risks." The Federal Reserve continues to show its unwavering support for the US, introducing a new bond purchase program worth $120 Billion a month and will continue to do so every month until 2% inflation is reached and lower unemployment is reached.

Apple breaks the $100B per Quarter mark

Apple released their highest revenue figure in the company's history, reporting $111.4 Billion, in which $65.6 billion came from iPhone sales. This was higher than the $59.8 billion analysts expected. Dan Ives praised Apple, stating that "this [was] a masterpiece quarter" for Apple.

Tesla was a mixed bag

Tesla missed earnings for the first time in 10 months. However, it wasn't all bad news, as their quarterly sales were better than expected. They have over 10 Billion in cash through the issuance of Tesla stock. Shares weakened slightly; however they rebounded today.

Be ready for more GameStop in your news feed. However, do not forget about the technical and fundamentals regarding specific currency pairs you are following.

(GME's price at closing was at 190. After hours? $350.)

Pullback in risk on – and that’s a good thing

De-risk! The market pulled back today on expensive tech stocks, overstretched valuations, with investors questions whether the stock market still has legs.

Broad Pullback

Steep valuations forcing a pullback

The FAANG stocks took the biggest hits as investors start to question their lofty valuations. Facebook and Apple are currently trading at 37 times price to earnings, with tech companies such as Salesforce and Zoom trading over 100 times their valuation. However, some consider this a healthy thing for the markets. Alec Young, chief investment officer at Tactical Alpha LLC, stated that “Frankly, the deeper the pullback in tech, the healthier it is for the overall market.” He further noted that the “market was overbought; too many people chased the tech names. It is all Healthy; the valuations have been stretched.”

U.S Dollar seeing gains on a pullback

The U.S dollar is set to record a weekly gain after a near ten-week downwards spiral for the greenback. However, with the Federal reserve continuing to pump liquidity into the markets, there are still plenty of headwinds against the U.S Dollar.

Take advantage of the pullback.

If you are an investor, try not to look at your investments to prevent any impulsive actions. Use this opportunity to buy your favorite stock for cheaper. Remember, this is a marathon, not a sprint.

Tech Stocks: Growth turned Safe Haven?

Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?

NASDAQ vs SP500

Tech Stocks - Premiums finally justified?

To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years

FANG P/E Ratios

We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),

FANG Current vs Average P/E Ratios

They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?

FANG Net Profit Margins
FANG Cashflow (Billions)

Is that a tank or a Tech stocks’ balance sheet?

With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation. 

Not everyone is convinced in the Stock rally

PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”  

 Are you joining the tech stock rally?