Analysts Are Betting Big on Apple's AI Push
AInvestSaturday, Jul 20, 2024 2:43 am ET
2min read
AAPL --

As all the major tech companies scramble to convince Wall Street that they will be the dominant players in the AI revolution, Apple Inc. is emerging as the clear frontrunner. Analysts are increasingly convinced that the upcoming AI-powered iPhone will drive consumers to upgrade from their older models, giving Apple a much-needed growth boost. Since the announcement of Apple Intelligence, Apple's stock has been on a steady rise, with more analysts upgrading their ratings.

As of Friday's close, Apple (AAPL.US) inched up 0.06% to $224.31, marking a roughly 21% gain for the year.

The Bullish Sentiment

Morgan Stanley analyst Erik Woodring maintained his buy rating on Apple on Monday, raising his price target from $216 to $273. He praised the tech giant as a top pick, citing the potential of the forthcoming AI platform, Apple Intelligence, to significantly boost hardware sales.

Igor Tishin of Harding Loevner LP is another analyst who recently expressed optimism. He noted that Apple has excelled in AI, despite appearing to lag behind last year, and rated the stock as a buy. I don't know how much profit there will be in the short term, but I think AI can create tremendous value for Apple in the second and third years, he said.

Loop analyst Ananda Baruah echoed this sentiment, predicting substantial growth in iPhone demand driven by AI. In a report, he wrote, Apple has the opportunity over the next few years to establish itself as the 'home base' for consumer AI, much like it did with the iPhone 15 years ago.

The upcoming device upgrade cycle is expected to be significant. According to compiled media data, the iPhone remains Apple's largest business, accounting for more than half of its fiscal 2023 revenue. However, iPhone revenue declined by 2% last year, indicating that the battery and camera improvements in the iPhone 14 and iPhone 15 weren't enough to entice consumers.

AI features, including the integration of ChatGPT through an agreement with OpenAI, could change that. Reports indicate that of Apple's over 800 million smartphone users, more than 40% use the iPhone 12 or earlier models, and another 27% use the iPhone 13. Currently, less than 10% of users have phones capable of upgrading to the AI software.

The Concerns

The positive reaction to Apple Intelligence has propelled Apple's stock up 36% from its April low, increasing its market value by about $900 billion and solidifying its position as the world's largest stock. However, this surge has also driven Apple's valuation above historical levels. Given Apple's significant weight in indices, this has broader market implications.

Apple's current forward price-to-earnings ratio exceeds 31 times, more than 50% above its 10-year average, and is near its highest level since early 2021 when the company's growth was much faster and interest rates were much lower.

Some believe the market may be overestimating the potential benefits of AI, especially since the phone upgrade cycle may take time to materialize after launch. ChatGPT is exciting, Gemini is exciting, but do they really influence consumer purchasing decisions? asked Matt Stucky, Senior Portfolio Manager at Northwestern Mutual Wealth Management. I think it's too early to conclude that.

Similarly, UBS has expressed skepticism, arguing that the anticipated AI supercycle might not materialize and that optimism for future growth could be misplaced. Analysts led by David Vogt wrote, Our analysis of smartphone demand across regions, past cycles, income demographics, and carrier subsidies suggests that next year's cycle will be more moderate. Vogt maintains a neutral rating on Apple stock.

Despite recent rating upgrades, Apple faces more skepticism from Wall Street compared to other major tech stocks. Less than 70% of analysts recommend buying Apple, while nearly 90% or more recommend buying Microsoft, Amazon, and Nvidia. Apple's stock has already surpassed the average analyst price target, suggesting that the excitement over AI might already be priced in.


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