Apple's Buyback Distraction? And Starbucks' Really Rough Week 5/3/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast drought. Yields on Treasury is dropping after a weak April jobs report boosted hopes for a Fed rate cut. And it's having an outsized effect on some sectors. We'll dive into the moves and bring you the trades. And later, we're getting you ready for earnings from Disney and Lyft. Starbucks orders up a rough week after results. And the yen finds its footing after hitting a 34-year low against the dollar. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Dan Nathan, Julie Beal, and Mike Coe.

0:45We start off with a huge move in Apple in the back of last night's earnings. Shares jumping nearly 6 % after the tech titan announced a monster stock buyback of$110 billion, the largest in history across all companies. And Apple's no stranger to giant repurchases, the company leading the S &P in reducing share count over the last year, buying nearly$85 billion worth of stock. Yesterday's announcement brings its total since 2012 to nearly$700 billion. But is this all just a bit of financial engineering that masks trouble under the surface. After all, overshadowed by yesterday's buyback, news was a 4 % drop in overall sales, with iPhone revenues down 10 % from a year ago.

1:26That is the largest decline since the pandemic. Other products like the Apple Watch, AirPods, also saw sales down 10%. And while Tim Cook told CNBC he feels good about the company's business in China, that iPhone sales in the country actually grew during the quarter, recent research has suggested that Apple is in fact losing share in that region. So is Apple using the buyback as a distraction to get investors to look away from its seemingly faltering fundamentals? And do we just buy that today? I mean, in terms of the stock pop, Tim. No, it's not a distraction. This isn't Tesla saying, look what's going on over here.

2:01Apple should get the benefit of the debt because it was five years ago, they issued$40 billion of debt at zero rates and it gave them the capital markets flexibility. That's been a driver. You ask every analyst on the street, I think they'll tell you that Apple's ability to have a capital markets dynamic to their share is part of the reason, if anything, they traded a premium. We know it's also the services business. But if you want to think about some of those some of those comps, first of all, very low bar coming into the numbers. But obviously a difficult comp in that one off kind of iPhone 14 dynamic.

2:31And Tim Cook and the company have explained that if you remove that, they're standing in the pocket saying it actually wasn't that bad. There are people that say, you know, and the outlook is now that at least year over year for fiscal full 24, that there will be some revenue growth. So you add in the margin expansion. You add in somewhere, somehow there's an AI led product cycle, you know, refresh. And I think but again, if we're just asking the question about Apple, is this smoke and mirrors? Absolutely not. And, you know, at six percent CAGR on EPS because of a buyback and a few other things, it's real.

3:03There's nothing fake about it. Yeah, but I don't think you can take a margin expansion to the bank over the next year or so. When you think about margins, it's really been flat, right? And so, like to me, if generative AI is the reason that margins are going to expand, services are going to be around that ecosystem, if you will, over the next few years. And again, we don't even know what the product is, right? That they're hopefully going to give us a bit of a blueprint when we get to WWDC in June. And again, consumers really won't get their hands on it if it does ship with the iPhone 16 in the fall.

3:31But the one comment to me more than anything else from last night's call, aside from the buyback, is that they are going to be spending a lot on generative AI. This is not something that they've spent on over the last couple of years. And granted, listen, we know that they were spending on Titan. That was the car project in this now, whatever. But at some point, if they don't have a commercialized product, if it doesn't cause a big upgrade cycle for the devices that they have in their, you know, right now in their playbook, then that spending might actually be a draw on earnings on margins, too.

4:03So to me, that financial engineering that you speak of is something that is going to have to remain in place. They generate a ton of cash. So they're going to be able to do that. We talked about it on the desk last night as that number was coming out. They've been buying 18, 19 billion dollars, you know, a quarter of the last couple of years. The last point I'll just make, you know, the stock closed up 6 percent. It opened up 8 percent. Over the course of this buyback period over the last 12 years or so, they have gone into the market and done accelerated buybacks. So maybe if you're buying it here, you think that they're going to, you know, you want to buy as they are buying right now.

4:34And then they're going to kind of set and forget that 15 to 20 billion a quarter like they've done over the last two years. I mean, financial engineering, whatever you want to call it, it sounds like a bad thing. It's what all companies, I mean, many, many companies out there are doing. It's been a consistent theme to the Apple story. But in this release and with this 6 % pop in today's session, Julie, are we giving Apple the benefit of the doubt on a couple of big question marks when it comes to, you know, that big AI product that will drive that iPhone refresh cycle and a turn in China when it does seem like, you know, in terms of the number of units sold, that was down, but the ASPs were higher?

5:10Yeah, I think it's for sure the market is giving Apple the benefit of the doubt that they're going to be able to, A, execute on AI, which I think is really within their wheelhouse. They're going to be able to leverage the work of other companies and wrap it in their Apple bundle. And the thing that's really beneficial to Apple that I don't think a lot of tech companies have is that they have trust with their customers in a way that Google doesn't, Amazon doesn't. They don't have the same kind of sense with privacy constraints that I think will actually really support the ability to do more adoption in AI.

5:43So I just think that that base of business and that installed user base is incredibly valuable for an AI product. I don't view the share buyback as financial engineering. You know, as a shareholder in any company, I look at it as a vote of confidence, but also just the ability to own more of the business, you know, taking out equity in the company. So for me, I think it's been a pretty positive quarter for them. Mike, what's your take? Yeah, I mean, there's a couple of things. First of all, there's a huge slug of Apple shares that are basically non-discretionary, held in the hands of passive investors.

6:16And so$110 billion buyback is material when you consider that it absorbs marginal supply that might be coming from active managers who are going to try to sell into it. But, you know, I'm kind of with Dan here that I think that we are, you know, maybe at a fairly reasonable valuation. I don't view this as financial engineering, but I don't view it as a reason to really chase the stock here either. Because, you know, look, it's an accretive thing for shareholders. There are different ways you can try to return capital to shareholders. Dividends is one, but this is actually a little bit better from a tax perspective for many investors if they're not getting qualified dividends.

6:52So, you know, when you look at it that way, you could say this is it's a reasonable thing for companies to do. Is it a reason to chase the stock after it's already had a big pop like it did this week? I don't think so. By the way, Mike, you can't see us on the desk, but we are nodding affirmatively on your point on the free float and 110 versus that which actually trades. It's a great point. I guess I get back to and I think ultimately maybe this is where Dan is. It's really what's the multiple you're going to pay on this stock, because this stock has been all about the multiple. And it's been all about the multiple because you've been attaching it to services.

7:22Maybe you've been attaching it to some capital markets in the past. If you want to pay 30 times, J.P. Morgan, I'm looking at a note, you know, they can put a 225 target on it based upon fiscal 25. You know, if you want to put a 26 on it, you know, you can do the same math. So that to me is where we are. Does this company deserve a peak market multiple? I don't think so. And that's really what what this analyst is doing. When I think about where the company has been and Julie talked about trust, you know, people have trust with with the company or at least the consumer has a trust with this company.

7:54The question is, does the investor community have the same trust with Apple as they had two years ago? And if you look at the stock relative to the market, it's been a big underperformer. Even with today's move, it's underperformed the S &P by about 50 percent. And I picked the high point of that relative outperformance. But from December 8th to today, even with this move, it's underperformed 15 percent to the market. So it's not that leader, even though I think it's a very safe place to be in a world where bad news, by the way, today for the market was good news. That's kind of with Apple. I understand the privacy aspect in terms of the consumer having trust with Apple from a data standpoint.

8:26But in terms of trust with Apple in terms of a product that actually works, I think that that is actually that doesn't really exist to the ongoing joke is that Siri stinks. Right. That Siri just doesn't work. I mean, when you say you want to Google something, Google's become, you know, the same word as search, basically. Right. That's the definition of search. You do a good search, you Google it. Yeah. But you don't Siri. We should have fun with this right now. We could go, hey, Siri, Melissa thinks you're not doing a good job. And you'd get a snarky answer. She would not be happy about that. Which is the best part of Siri because she is snarky.

8:57Well, I mean, listen, what Apple has done is they've used iPhone is now synonymous with cell phone. OK. And so when you think about that and they've done, they've built this great wearables business. They've built this great ecosystem between your iPad, your iMac, your iPhone, whatever other stuff that you want to do. And I think that's also, I think, a little bit what Julie's getting to in a way is that when we don't have trust about a lot of these other digital platforms for our personal data and the like, I think that we, you know, we do trust Apple for a whole host of reasons, the people that use it.

9:25You know, listen, I don't find what's going on here particularly interesting. It's a$400 billion revenue company. Margins have improved a little bit as services have become a greater percentage of their revenue. That's where they wanted to go. That's why something like a Vision Pro and spatial computing could be interesting in the next few years or so. But it's not interesting right now. What they decide to do in generative AI lives in that world, too, with VR and spatial computing and the like. So there might be another stage of growth. But talk to me about what that looks like. It's going from$400 billion in revenue to maybe$450 billion and then$500 billion at a higher margin.

10:01But the spend associated with that is going to be considerable. So to me, you know, you look at this thing, you say they're buying back all this stock. Mike called it accretive. Well, is it accretive on their short-term cash if they're getting 5 % right now? If they're buying back stock that maybe is growing earnings at mid to best high single digits, you know, it's not really that attractive. It's 6 % of the S &P 500. The S &P 500's dividend yield is three times that of Apple's, if you think about that. I think we're overthinking this one. Are we? Well, I mean, I hear you. Should we split it up?

10:31Let's split it up. No, I think you guys actually agree on a lot of stuff. We do. And I think it's right to kind of point out the overall growth of the company. If now it's a 6 percent CAGR with 110 buyback and I can get 5 percent cash, what's more? I get it. I mean, I kind of feel like and Julie said this, I like the company putting their money where their mouth is. And I also go out and say that, you know, Congress and Washington and certain people that have had a best have had a self-interest in talking about buybacks on Wall Street as the devil. They're not the devil. And I think that's part of the part of the reason people might be having this reaction here, because I think there's been a focus at times cutting corporate taxes, letting corporates buy back their stock.

11:11And I understand there's a cycle there that's happened. It's not Apple. Yeah. I mean, the other question here, Mike, is that in the earnings call, in the earnings release, did we come away feeling better about the China market and the prospects of the China market in, say, six months or so? Do we think that that market is going to improve? Do you think they're going to stop losing market share there? Do you think the consumer is going to turn around? What do you think? I think that China's situation is pretty grim. Look, I mean, Starbucks is not the same thing as Apple. But I mean, I think if they are a canary in the coal mine in any way for China consumers, they didn't tell us a very good story this week at all.

11:49And look, you know, we also didn't see sequential year on year growth for this quarter. And I think that's really what you need to start seeing. I mean, it's great to talk a good game about what's going to happen, and things aren't as bad. We're not going to see sort of giving up market share in China the way we thought we were. But ultimately, you have to show it with the numbers. And supposedly, next quarter, we might anticipate year-on-year growth of 2%, which, by the way, is less than the rate of inflation. So that's not real growth, if you think about it. What we want to see is a number that comes in above that.

12:22So, you know, I'd like to see year on year growth for a quarter of north of three and a half percent, and then I'll be convinced. All right. Well, Wells Fargo is bullish on Apple playing up the benefits of China's iPhone sales and AI in its new note. Aaron Rakers is the firm's equity strategist. Aaron, great to have you with us. Thanks for having me. What struck me in the conference call, Aaron, is that you actually asked that very question in terms of China. We've gotten so many data points from a counterpoint Research, for instance, which shows down 19 percent in terms of sales. Their research shows that.

12:55IDC down 10 percent in terms of shipments for this quarter. And you asked, what are we missing here? Did you get a good answer in your view? Are you satisfied with their China business? Well, I think Tim answered the question, you know, spot on, which is basically he could talk to his business. I mean, clearly, to your point, counterpoint research. But even the internal smartphone data within China showed like a 30 plus percent decline, at least in the first two months of this most recent quarter. So I guess the answer is somewhere underneath of the shipment number. You know, you mentioned earlier mix.

13:28They mentioned offline that, you know, strong mix of iPhone 15 Pro and Pro Max. So we think that's certainly a variable. But for them to grow, given the data points in this last quarter, was pretty notable and why we actually asked that question. What do you think the dynamics of the China market will be, even in a strong iPhone cycle, Aaron? I'm just wondering because they were really relying on mix in terms of the newer phones, the more expensive phones. Is that the kind of market dynamic that we are going to expect in China? Because that would seem to me then they're going to be ceding a lot of market share to some of the other competitors that have cheaper phones.

14:03Yeah, and I think it's going to be competitive. And Tim alluded to that quite a bit on the call last night. I think one other consideration is that they even grew without the tough compare when adjusting for the impact of channel fill and such last year. So we think, you know, look, it's going to be a competitive market. We think there's a strong market in China for feature rich phones. And we think the the upgrade opportunity going into the next generation iPhones later this year presents a positive driver for the company, which is why we've stuck by our overweight rating. Aaron, so it's Tim.

14:35Thanks for joining. I see your price target. It's actually posted on the screen right now of 225. Talk about the multiple behind that. And again, you know, where you are relative to the last five years in Apple. At times, there's been a real argument for a peak Apple multiple relative to itself. And do you think that's here? Yeah. So first of all, I think, you know, our note going into this print was was more cautious. Right. We thought maybe the stock, it was going to be a tough quarter. We thought we could see possibly a pullback in the shares. But clearly, both the China growth, but also the services growth, and now kicking forward to this AI narrative, we think there's catalyst ahead.

15:11So when we look at the valuation, we believe the stock can hold kind of a high 20 multiple, if not 30. Over the last five years, it's traded right at a medium multiple around 25. And one other consideration I'd highlight is the fact that Apple includes stock-based comp in their full earnings number. It's about close to 10 % dilution to the EPS line. So we think the valuation into that high 20 multiple range comparable to what we've seen over the last five years is justified given the breadth of what Apple has and also the free cash flow. And as you guys mentioned, the capital return earlier in the call.

15:47Aaron, when you talk about catalysts again, you just mentioned like heading into the print. And I said this on Monday. I would have loved to have seen just the kind of quarter that they released and nothing else. I think the stock likely would have traded down off that or been flat-ish. It certainly wouldn't have gapped up 8%, in my opinion. And then that could have set up for a decent trade, if you will, into WWDC. So talking about Catalyst, you've followed this company for a long time. They don't really – they're going to give us a good sense of what the software looks like. But where generative AI is going to live supposedly on this device, right, enabling a bunch of services.

16:23So do you expect in the fall any whiz bang sort of product coming from Apple based on generative AI that will cause a meaningful upgrade iPhone cycle? Well, one of the things we've put in our note is that, you know, there was a research paper published by Apple back a month or so ago talking about how they're going to use smaller models using partnerships. I know, you know, others today have highlighted, you know, Google and that's been reported. But, you know, we think that they can, you know, do a multimodal large language model on device that's going to be quite attractive and differentiated.

16:57I think, you know, the other thing that was brought up in a call, I mean, Apple does not spend nearly the CapEx 30, 40 billion of CapEx that some of these other hyperscale cloud customers do. And so we think that's attractive in the financial model. The final thing I would highlight, it's just important to remember, Apple's been embedding AI processing neural engines in their SOCs since 2017. So they have a long track record, deep silicon capabilities, which I think is core to the differentiation for the story. Aaron, great to speak with you. Thanks for your time. Thank you. Aaron Rakers, Wells Fargo.

17:33All right, Julie, would you buy it here? Do you own it? Yeah, no, I think as an owner, I'm happy owning the stock here. I think I can understand people's hesitation with wanting to buy here after today's move. But it's like, if I compare this to, say, Tesla in a would you rather, I'm paying half the multiple in a business that has more recurring revenue and is arguably maybe less competitive over the longer term. And I think that is actually pretty compelling when I think about large cap tech on a relative basis. It's an interesting would you rather, which you did by yourself, just unsolicited.

18:11But I will ask another one and I'll ask it to Mike. And that would be, would you rather Apple or Alphabet? I'd rather Alphabet. I'd rather Microsoft too, by the way. You know, Microsoft, I think, is trading. But I should add one other thing, though. We own Apple. One of the things I was just commenting about is I wouldn't chase it here. But I have to say, you know, we own the stock and we didn't sell any into this. So, you know, it wasn't an overwhelmingly convincing reason for me to buy more of it, I guess. That's that's what I would say. But I would buy more of my stuff. Coming up, builders, banks and big tech will dive into a wild week for the markets and the catalyst behind the S &P 500's second winning week in a row.

18:51On next week, make it three. We'll debate that, plus lifting off the ride hailing stock revving up ahead of next week's earning support inside the recent move higher and what to expect from results right after this. This is Fast Money with Melissa Lee right here on CNBC.

19:14Welcome back to Fast Money. Treasury yields falling today after weaker than expected jobs figures for April. Disappointing payroll growth reassuring investors that the Fed rate cut is in fact on the table this year. Earlier today, the 10-year Treasury yield briefly dipping below 4.5 % in the two-year, touching its lowest level in almost a month. Those moves helping interest rate-sensitive sectors like homebuilders and financials rise, the ITB ending the day up nearly 2%, and the KRE hit a one-month high. Are these rates here to stay, Tim? It's interesting. Was this the week that rates topped? I mean, and people are all over the map here.

19:48So, you know, you take a week where at one point we were 4.73 on the intraday and we were down at 4.45 on the intraday low. The two-year was even more pronounced in the short end. If If you look at what futures did to those Fed cuts, we went to basically, you know, we had we had roughly eight or nine bips out to September. Now we've priced in. We priced in a cut. We priced in one and a half by December. So it was a week where we had a chance to come off the Fed meeting. And again, no matter how hard he tries, Powell always sounds dovish. And so it got to a place where if you look at what happened this week and today's payroll number almost seemed to be the old years guy somewhere, the Goldilocks number because it was weak enough, six-month weaker.

20:28It had the dynamics that basically say the economy's not falling apart, but there's no question this was a Fed relief. So back to regionals versus money centers. I mean, I don't know why you're not buying money centers right here. Again, because I think the multiples are really well protected. And I think, look, whether at 470 or 440, we have higher rates, we have higher NIMS. Yeah. It's interesting that you started with the KRE, so the regional banks. It's like, They've really been range bound. So the fact that you said that, you know, they are trading at a one month high. They opened up today at the highs.

20:58They closed at the lows and they can't get out of their own way. They're still down 8 % from the highs. I think the 52 week highs in December. And then on the money center, it does seem like folks who are worried about, let's say, a Bank of America or a Citibank and they're held to maturity mark to market portfolios. When yields come in, that should take a little pressure off of that. Notice that J.P. Morgan, okay, so this was, I think it was April 12th, a gap down 6.5%. We talked about it at the time, a huge move for a stock like that, right, that was seemingly making new all-time highs every day for like two months leading up into it.

21:29It filled in that gap, but it's really lost some steam, especially as rates have come in over the last, and maybe that's just a broadening out of like folks looking at financials and the like, but retails don't act well, even with yields coming from 4.75 down to 4.5. half. And then J.P. Morgan, the one that we always spend a lot of time looking at, doesn't act particularly well either. Earmuffs for Karen. Also, she's out there listening. I mean, geez. Julie, where do you stand? I mean, we had Tom Michaud, the CEO of KBW, on earlier this week, the day of the Fed meeting, actually. And he said he would, you know, he would steer clear, basically, of regionals.

22:02He prefers money center banks because regionals, they do have more commercial real estate exposure. They just do. Yeah, just that on its own is enough to have me running for the exits. I don't think it's a place that I want to be for any kind of long-term earnings visibility. The money setters to me are a much better protected area. And I think it's really, really hard to predict where we are in terms of interest rate cuts and rates. It sort of sounds like a remodel project where it's like, it's going to be done in June, it's going to be done in September, December, September. And I think that that really leads investors to feel leery of making any kind of bets that are dependent on interest rate movements one way or the other.