Big Tech’s buyback bonanza demands closer attention
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When Microsoft earmarked $60bn this week to buy back its own stock, it barely warranted a mention in the financial media. Such gargantuan amounts seem almost routine these days.
The software company’s recent repurchases already put it on pace to exhaust the money in little more than two years.
Yet tech’s buyback bonanza demands closer attention at a time when big new tech markets have been opening up. Much of corporate America is under fire for diverting its spare cash into share repurchases, rather than increasing investment and risk-taking. For all but the richest tech companies, the same concerns are hard to ignore.
Financial engineering like this was long denounced in Silicon Valley as a diversion from the true purpose of tech companies: to go for broke in the next big markets.
As the industry has matured, tech companies have become some of the biggest exponents of the buyback. Microsoft’s share count has fallen by almost a third since the tech bubble two decades ago — even after taking account of all the new shares handed to employees or used in acquisitions.
It seems, thanks to the boom in Big Tech’s profits, that some companies really can have it all. Apple has spent nearly $450bn since it began the repurchases in 2013. Its shareholders may one day look back and regret that it did not risk a slice of that money on some entirely new market, like automaking, but few currently question its level of investment in a broad range of technologies.
The amount Microsoft ploughs annually into buying up its own stock has quadrupled since Satya Nadella took over as chief executive in 2014 — but so has its capital spending.
For others, gorging on their own stock has had more problematic results. The amounts involved put the rest of Corporate America in the shade. IBM, Oracle, Intel and Cisco have each reduced their outstanding share count by between 40 and 50 per cent since the tech bubble.
This has, to varying degrees, helped to buttress share prices that have underperformed the wider stock market. Oracle’s enterprise value may have crept up by only a quarter since the start of the millennium but, thanks to the falling share count, its stock price has almost doubled.
It is hard to escape the conclusion that some of these companies got their financial priorities wrong, and that by failing to place bigger bets on new markets, they have been slowly devouring themselves. This is clearer in some cases than others. IBM has bought back about half of its stock since the peak of the tech bubble, but its share price is roughly the same level it started the millennium at.
Failing to invest enough at the dawn of the cloud computing era has left it well behind the leaders, and catching up looks a stretch. IBM’s capital spending dropped to $2.6bn last year: Amazon, by contrast, has ploughed nearly $50bn into capex over the past 12 months, most of it into new data centres and warehouses.
Intel also capped its investment at a time when the chip industry was going through a historic boom. Under pressure to appease Wall Street, it ramped up the repurchases to almost $40bn between 2018 and 2020, four times as much as it spent on buybacks in the previous three years.
Both companies have belatedly reset their financial priorities. IBM climbed off the buyback treadmill in 2014, slashing back on the repurchases, before finally abandoning them completely two years ago. Intel’s new chief executive, Pat Gelsinger, has also promised to redirect cash into investments.
For Oracle and Cisco, the negative effects of aggressive buyback programmes have been less clear-cut. But while maintaining their position — and high margins — in their core businesses, they have laboured to keep up in tech’s booming new markets.
This week, Cisco showed signs of resetting its priorities. It raised its growth targets and laid out a stronger case for why Wall Street should view it more as a software company — a growth sector that has been in high demand. Cisco’s chief, Chuck Robbins, conceded the company could be open to criticism for not investing more heavily in the past, and said it would no longer try to increase earnings per share faster than revenues.
At least Cisco still has the cash to increase investment while continuing to return significant capital to shareholders. Many others do not have that luxury if they are going to invest to stay competitive.