Apple has the financial strength to ramp up its buyback program, according to RBC Capital Markets analyst Amit Daryanani.
Apple could buy back $25 billion of its own stock over the next five years.
Apple reports earnings after Tuesday's closing bell.
Apple reports earnings after Tuesday's closing bell, and investors are eager to see by how much the tech giant's massive cash pile has grown.
At $261 billion, Apple has the largest cash pile of any US company, and a large chunk of that is stashed overseas. President Donald Trump's Tax Cuts and Jobs Act incentivizes companies to repatriate overseas cash, with the hopes they will use it to stimulate business investment and subsequently economic expansion.
But companies have several choices for how to use that cash, and capex isn't always at the top of the list. They could use their overseas cash on employee compensation, share buybacks, or increased dividends.
And RBC Capital Markets senior analyst Amit Daryanani thinks share buybacks will be the route the company takes.
"We think AAPL's solid free cash flow and $163B net cash balance will result in a meaningful step-up in capital allocation next quarter," Daryanani wrote. Apple's net cash, or cash available for spending after subtracting current liabilities, is $163 billion.
Apple could accomplish $25 billion in buybacks over the next five years, Daryanani suggested, which would reduce the number of shares on the market by approximately 1.6 billion. That would be more than 20% of 4.59 billion shares that are available on the open market.
Daryanani's price target is $203 a share, about 23% above the stock's current levels. His bullish position is supported by a few key factors he says investors should watch out for in the report.
One factor is its iOS system. Apple's superior iOS should attract more application developers, and therefore more users, Daryanani said. "AAPL’s true differentiation is its unique computing ecosystem: iOS."
He says Apple's iOS "will be difficult for competitors to replicate in scale."
Apple also has a unique opportunity over its competitors through its ability to develop its own operating system, Daryanani says. "Rather than just targeting the hardware layer, AAPL is able to capture incremental profits by also being the OS developer, processor manufacturer, and in some instances the retailer of the product," he wrote.
Wall Street expects Apple to earn $2.65 a share on revenue of $60.91 billion, according to Bloomberg data.
Apple shares are down 4.06% this year.