Apple is one of the greatest stock buyback stories in history. It’s time to cut it. We have long been fans of Apple’s repurchase plans in addition to the margin expansion attributable to strong services sales. The combination has supported earnings growth even when overall sales stalled. However, with shares down nearly 20% year to date, it’s becoming clearer by the day that earnings growth predicated on buybacks is not what investors are looking for. What changed? It’s all about the introduction of generative AI and the financially lucrative opportunities that comes with it. That’s especially true when we consider that the addressable market for artificial intelligence is largely a result of technology’s ability to disrupt certain markets — such as online search engines, for example, which is why we have seen shares of Alphabet become range-bound over the past year. Apple has a similar issue. Yes, its ecosystem remains incredibly robust with staunchly loyal consumers, but it’s unclear whether that will continue to be the case should Apple fail to properly integrate artificial intelligence. So far, it has not. Apple’s annual Worldwide Developers Conference earlier this month was underwhelming on the AI front. As we wrote at the time, we didn’t expect much but were still disappointed . Jim Cramer has noted that Apple wants its products to be perfect before rolling them out, which has delayed the release of a fully artificial intelligence Siri that holds conversations and problem-solves on a human-like level. Sure, Apple launched a ChatGPT integration with Siri back in December. But the full promise of Apple Intelligence — the company’s AI banner that was unveiled at last year’s WWDC — has not been realized. Apple has been playing catch-up for a year, rolling out AI features piecemeal. On one hand, incremental AI rollouts have prolonged the iPhone upgrade cycle. On the other hand, however, how much longer can users and investors wait for the kinds of AI features that are becoming standard from mobile device competitors? While there are efforts to open it up, the Apple product ecosystem is largely locked down. A failure to offer up the latest and greatest AI solutions may well have users rethinking their options. We don’t think we’re there yet, but the patience of the consumer will only last so long, especially as more impactful AI solutions that really do change how we interact with our devices start coming to market. For this reason, we think it’s time for a change when it comes to Apple’s capital allocation strategy. As Jim put it during Tuesday’s Morning Meeting: “They have to have an AI solution. They have to stop buying back stock. It’s not working.” AAPL mountain 2015-06-24 Apple stock over 10 years There is no denying the positive impact Apple’s share repurchases have had over the past decade. The outstanding share count, which is what you divide net income by to determine earnings per share (EPS), has declined by nearly a third over the past 10 years. However, we’re at a moment when investors care far more about gaining more clarity on the health of the company overall, for the long term, than they do about the low-single-digit EPS growth offered up by the repurchase program. As a company grows, the buyback has to either grow at a proportional rate or it simply becomes less effective. Indeed, from 2013 to 2021, the average share count reduction was just over 5% of total shares outstanding. Since 2022, however, shares have only declined by less than 3% per year, on average. That dynamic has led Wall Street to ask: Is Apple better off reducing share count by less than 3% on average, in turn boosting earnings by only slightly more than that? Or is it better off foregoing the EPS benefit and instead reallocating the billions of dollars being spent on buybacks toward acquisitions? Apple’s stock performance versus the overall market screams for the latter. Apple should reduce the buyback allocation and start gobbling up AI companies and top engineers. Take a page out of Meta Platforms CEO Mark Zuckerberg’s playbook and make jaw-dropping offers to the world’s top AI talent. Perplexity AI is one that Jim called out a few weeks ago as being a good fit for Apple — and since then, several Wall Street firms have said the same. The latest is Bank of America, whose analyst said Tuesday that they see “many reasons” a deal would make sense. According to Bloomberg News, Apple has had internal talks about possibly buying Perplexity. However, the report made it clear that Apple has made no offers and has not spoken to the AI startup’s management. The current valuation of Perplexity stands at about $14 billion. So, considering that Apple has authorized a $110 billion buyback this year, we see that it’s well-equipped to start acquiring companies and keeping the buyback going at a smaller rate, if desired. With a valuation of $14 billion, Apple would presumably need to offer a premium. But even with a 50% premium, or a $21 billion valuation, it’s clear that Apple has plenty of capital to get multiple deals done if it were to pull back on the buybacks for a year or so. Therein lies the beauty of the buyback. Unlike a dividend, you can pause a buyback for a year or two without panicking the shareholder base. A dividend cut, however, is generally seen as a bad sign in terms of financial health and management confidence in the business. Investors don’t own Apple for its 0.5% annual dividend yield. Nevertheless, a dividend cut or pause at Apple would be terrible optics. If Apple were to resign itself to prioritizing the buyback over getting its AI strategy locked in, investors are going to increasingly start pricing the stock as they would any maturing company, with a lower price-to-earnings multiple. When you consider the headwinds facing Apple’s existing offerings — tariffs on hardware and extended refresh cycles, along with efforts to open up the App Store to the detriment of services revenue growth, and questions as to Alphabet’s right to cut $20 billion checks to remain the default search on Apple’s Safari browser — it’s becoming increasingly hard to argue against a lower P/E. However, if Apple were to pause the buyback for a year or two, freeing up some $100 billion to $200 billion in cash for the AI initiatives, investors would reward the stock. While not getting the roughly 3% EPS growth we have become accustomed to via the buyback, we are more than willing to bet that the multiple expansion resulting from the increased investor confidence would be worth it — to say nothing of the potential acceleration in sales growth that an exciting AI strategy could unlock. (Jim Cramer’s Charitable Trust is long AAPL and META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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