We continue to analyze the recent lawsuit filed by the United States Department of Justice (DOJ) against Apple. Yesterday, the Financial Times reported on a rather curious argument made by the DOJ. In the fiscal year 2023, Apple spent twice as much on share buybacks as it did on research and development. These numbers have been presented as ‘evidence’ of Apple’s lack of competition, according to the DOJ, when compared to Google, whose spending on R&D matched its share buybacks. Does this make any sense?
An argument that raises more questions than answers
The logic behind share buybacks is simple: a company uses its excess cash to buy its own shares and then cancels them. This has three main benefits: it reduces the number of shares in circulation, which means the company has to pay less money in dividends; it increases the effective value of each remaining share; and, by reducing the number of shares while income remains constant, it increases earnings per share (EPS), a key measure of a company’s financial performance. Apple, a company that traditionally has a significant cash surplus, has invested over $650 billion in share buybacks in the last decade.
However, the DOJ compares these figures with R&D spending, pointing out that while Apple spent $30 billion on research and development in 2023, it invested $77 billion in stock buybacks during the same period. The lawsuit suggests that, although Apple’s conduct has benefited its shareholders, it has come at a great cost to consumers, inflating the price of iPhones and preventing the development of better products.
This argument has been criticized for its lack of solidity. Stock buybacks are, precisely, a show of confidence in the future of the company. It only makes sense to buy back own shares if it is believed to be a better way to use the money and generate income than other forms of investment.
It is also worth noting that Apple’s R&D expenditure as a proportion of its revenue has historically been lower than that of other technology companies. This is largely due to the fact that the company develops a relatively limited number of devices and technologies. Unlike other companies like Google, taking the example of the DOJ, that launch services and close them shortly after (see Google Stadia), Apple focuses on a few products.
In this context, we can also remember that Apple doesn’t necessarily arrive first to a market, but it does offer the best product. MP3 players existed before the iPod, smartwatches before the Apple Watch, and VR glasses before the Vision Pro. In this sense, although it obviously takes an immense amount of resources for research and development —$30 billion over a year goes a long way—, most of those resources are allocated to integration, improving existing technologies, and presenting an attractive product. A product that, many times, unlike those that have cost millions to develop, offers real value to future customers.
Undoubtedly, the argument presented by the DOJ and highlighted by the FT is not one of the strong points of the lawsuit. While some of the reactions to it are laughable and Apple’s response is clear and forceful, points like these catch our attention. We will see, probably more than a year from now, what the courts think.
