The repurchase boom of tech giants needs to be watched closely


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When Microsoft allocated $60 billion this week to repurchase its own stock, it had little reason to mention it in the financial media. Nowadays, such a large number seems almost commonplace.

The software company’s recent buyback has caused it to run out of funds in a little over two years.

However, as the large-scale new technology market opens up, the repurchase boom of technology stocks requires close attention. Many American companies have come under fire for using their idle cash for stock buybacks instead of increasing investment and risk-taking. For all companies except the richest technology companies, the same concerns cannot be ignored.

For a long time, Silicon Valley has condemned such financial engineering as deviating from the true purpose of technology companies: bankruptcy in the next big market.

As the industry matures, technology companies have become the largest representatives of buybacks. Since the tech bubble 20 years ago, the number of Microsoft shares has fallen by nearly a third-even taking into account all new shares handed over to employees or used for acquisitions.

Due to the surge in profits of large technology companies, it seems that some companies can really have everything. Since the start of the repurchase in 2013, Apple has spent nearly $450 billion. One day, its shareholders may look back and regret not taking a share in new markets such as automobile manufacturing, but few people currently question its level of investment in a wide range of technical fields.

Since Satya Nadella took over as CEO in 2014, Microsoft’s annual investment in buying its own shares has quadrupled—but so has its capital expenditures.

For others, eating and drinking their own stocks creates more problems. The amount involved eclipses the rest of the American corporate world. Since the technology bubble, IBM, Oracle, Intel, and Cisco have each reduced the number of outstanding shares by 40% to 50%.

This helped support underperforming stock prices to varying degrees. Since the millennium, Oracle’s corporate value may have risen by only a quarter, but its share price has almost doubled due to the decline in the number of shares.

It is hard not to conclude that some of these companies’ financial priorities are wrong, and they have been slowly devouring themselves because they have failed to invest larger bets in new markets. This is clearer in some cases than in others. Since the technology bubble peaked, IBM has bought back about half of its stock, but its stock price is about the same as it was at the beginning of the millennium.

Failure to invest enough in the early days of cloud computing has made it far behind the leaders, and catching up seems far-fetched. IBM’s capital expenditures fell to US$2.6 billion last year: In contrast, Amazon has invested nearly US$50 billion in capital expenditures in the past 12 months, most of which is used in new data centers and warehouses.

While the chip industry is experiencing historical prosperity, Intel has also restricted its investment. Under pressure to appease Wall Street, it increased the repurchase scale to nearly $40 billion between 2018 and 2020, which is four times the repurchase expenditure in the past three years.

Both companies belatedly reset their financial priorities. IBM withdrew from the repurchase program in 2014, drastically reduced the repurchase, and finally gave up completely two years ago. Intel’s new CEO Pat Gelsinger (Pat Gelsinger) also promised to use cash for investment.

For Oracle and Cisco, the negative impact of the aggressive repurchase program is not so obvious. However, while maintaining their core business status and high profit margins, they are striving to keep up with the booming new market of technology.

This week, Cisco showed signs of realigning its priorities. It raises its growth targets and provides a stronger reason why Wall Street should treat it more as a software company—a growth sector that is in high demand. Cisco CEO Chuck Robbins admitted that the company may be criticized for not increasing investment in the past, and said that it will no longer try to increase earnings per share at a rate that exceeds revenue.

At least Cisco still has cash to increase investment while continuing to return large amounts of capital to shareholders. If they are to invest to stay competitive, many others do not have this luxury.

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