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Is Apple a Buy ahead of the WWDC?

AInvestThursday, May 30, 2024 4:58 pm ET
8min read

As we approach the upcoming WWDC event, all eyes are on Apple Inc. ($AAPL(AAPL)), which has recently underperformed compared to its peers amid concerns that it is trailing in the AI race. The WWDC is poised to change this perception and could present a compelling buying opportunity for AAPL. 

Since the release of ChatGPT in November 2022, the tech landscape has undergone significant transformations. Companies across various sectors have been exploring generative AI applications to enhance business operations, with tech giants like Google ($GOOGL(GOOGL)), Meta ($META(META)), Amazon ($AMZN(AMZN)), and Microsoft ($MSFT(MSFT)) focusing on securing compute resources for the next generation of AI applications. This AI boom has driven Nvidia ($NVDA(NVDA)) to new heights and reshaped public expectations for content, media, and technological experiences. 

Amidst this AI revolution, Apple has remained notably quiet. However, with the upcoming WWDC, Apple aims to demonstrate its commitment to AI innovation, potentially marking a turning point for the stock.

Apple and the AI Revolution

Despite the recent generative AI boom, which has the potential to disrupt the corporate tech hierarchy, Apple should remain largely unaffected. Apple's core business is not directly impacted by the introduction of knowledge-on-demand applications like ChatGPT. 

While products such as Siri might see some influence from AI advancements, Apple's primary revenue drivers—its hardware and premium services—remain strong. The high demand for Apple's hardware and its extensive physical network ensure that its service and content offerings will continue to thrive. No matter the digital advancements, users are likely to access these services on Apple devices, underscoring the company's foundational role in the tech ecosystem. This is evident in Google's substantial annual payment to Apple for default search engine status in Safari, highlighting Apple's strategic advantage.

Apple's high-margin, high-growth services segment, which includes Apple TV+, Apple Music, Apple News+, and other apps, is well-insulated from the recent advances in generative AI. The company's focus on content creation and curation, rather than knowledge or functionality apps, positions it uniquely against AI-driven disruptions. Apple's content suite benefits from major distribution advantages, ensuring it remains competitive. 

Additionally, Apple's financial services segment, including Apple Card and Apple BNPL, is not significantly threatened by generative AI. Furthermore, Apple stands to benefit from new AI market entrants that will monetize their apps through the App Store, allowing Apple to take a cut.

This combination of robust hardware demand, strategic service offerings, and advantageous positioning in the AI ecosystem suggests that Apple is not trailing as much in the AI race as some might believe.

What to Expect at WWDC

Apple's Worldwide Developers Conference (WWDC) is set to kick off on June 10, and the anticipation is high, particularly surrounding potential announcements related to artificial intelligence. With the recent generative AI boom reshaping the tech landscape, Apple has remained relatively quiet, but this event is expected to change that narrative. 

There are strong indications from analysts and insiders that Apple may unveil a significant partnership with OpenAI at WWDC. This partnership could introduce an OpenAI-powered chatbot with exclusive features that leverage both on-device and cloud-based Apple Large Language Models (LLMs), powered by Apple's high-end chips. Such a move would not only position Apple competitively in the AI race but also open up new revenue streams through its extensive services and product ecosystem.

Additionally, Apple's discussions with Google about licensing Gemini AI have been noted, though the focus appears to be on the potential OpenAI collaboration. This partnership is seen as more foundational for Apple's AI strategy, potentially driving a major upgrade cycle for the iPhone and other devices. 

The AI enhancements are expected to be integrated across Apple's product line, enhancing user experience and leveraging Apple's unmatched installed base of over 2.2 billion active devices. 

Apple is expected to unveil its new AI chips designed specifically for running artificial intelligence software in data centers. According to a report from The Wall Street Journal, these chips are aimed at AI inference rather than training AI models. This move highlights Apple's strategic focus on enhancing real-time AI capabilities across its ecosystem. The introduction of AI inference chips could significantly bolster Apple's AI-driven services and applications, providing faster and more efficient processing of AI tasks on their devices.

AI training models and inference chips serve distinct roles in the AI and machine learning landscape. Training models involve developing and refining machine learning algorithms by exposing them to large datasets, which is a computationally intensive process requiring powerful hardware like GPUs and TPUs. This training is done infrequently but demands substantial resources.

In contrast, AI inference involves using these pre-trained models to make predictions or decisions based on new data in real-time or near-real-time applications. Inference chips are designed for efficiency and low power consumption, enabling rapid processing of AI tasks in deployed systems such as voice assistants and recommendation engines. The introduction of AI inference chips at WWDC underscores Apple's commitment to integrating advanced AI functionalities into its products while maintaining a high level of performance and efficiency.

A few other areas top watch according to MacRumors include: auto-generated Apple Music playlists based on user input, such as mood; AI-assisted writing in Pages; AI-assisted slide deck creation in Keynote; AI code writing in Xcode for developers; improved Spotlight search; Siri improvements that integrate large-language models (LLMs) for natural conversation capabilities and enhanced user personalization; new integration between Siri and the Messages app to suggest response options; and Shortcuts integration with Siri to automate complex or multi-step tasks using voice-based commands.

As Apple prepares to reveal its AI capabilities, the market is keenly watching for how these developments could influence its competitive standing and financial performance, with many analysts predicting a positive impact on Apple's revenue and strategic positioning.

Apple- The Bull Case

Apple presents a compelling investment opportunity, particularly in light of temporary challenges in product sales that are expected to rebound as inflation targets are met and monetary policies ease in developed economies. The current 15% discount on Apple's stock compared to historical averages enhances its attractiveness.

Apple's robust market position, combined with its user stack advantages and superior services distribution leverage, insulates the company from many market disruptions and underscores its resilience. These factors collectively make Apple an appealing option for investors seeking a stable and potentially lucrative addition to their portfolios.

Apple is no longer seen as a legacy tech company struggling to keep up; instead, it boasts an incredible moat that protects it from disruptions, including the rise of new AI tools and applications. The company's consistent services growth and the anticipated iPhone 16 upgrade cycle further bolster this view. 

Analysts at Bank of America anticipate that AI-enabled phones, termed IntelliPhones, will drive a significant multi-year upgrade cycle, akin to the introduction of smartphones. This next upgrade cycle is expected to be a once-in-a-decade event, with a rapid adoption curve. While full features might not be unveiled at WWDC, a clear path for these IntelliPhones to become mainstream, especially with integrated conversational AI, is anticipated.

Additionally, analysts at Wedbush have raised Apple's price target from $250 to $275, reflecting optimism about the forthcoming AI-driven iPhone 16 supercycle. Their recent supply chain checks in Asia suggest stabilizing iPhone demand, a positive indicator heading into this significant upgrade phase. 

Furthermore, Apple's advancements in the payments space, particularly with Apple Pay and potential B2B functionalities, offer substantial growth opportunities that remain underappreciated by many investors. With its strong brand, pricing power, and continued innovation, especially as highlighted by the upcoming WWDC2024 event, Apple stands poised to deliver impressive long-term value.

Apple- The Bear Case

Despite Apple's strong market position, several risks could impact its performance and make it a less favorable investment. Over the past six quarters, Apple has experienced weaker revenue growth, which raises concerns about its future profitability, especially if this trend continues. 

The company's reliance on iPhone and hardware sales means that any continued slump in these areas could significantly affect its bottom line. While improved consumer sentiment may bolster personal device spending, macroeconomic factors like rising interest rates could dampen both corporate and personal expenditures on Apple devices. 

Higher interest rates could slow economic growth, reducing demand for Apple's products and services. Additionally, increased rates can negatively impact market multiples, potentially affecting Apple's stock valuation on both fundamental and multiple fronts.

Another significant risk is the current valuation of Apple's stock. Despite its strong profitability from services, Apple's stock is trading at nearly 30 times earnings, which is high given its moderate growth profile. This elevated multiple could lead to future issues if market conditions change and the multiple re-rates lower. 

The tech sector's experience in 2022, where valuations contracted as interest rates rose, serves as a cautionary tale. If Apple's valuation adjusts downward, investors might face substantial losses. Therefore, while Apple's strong market position and profitability are undeniable, these factors must be weighed against the potential risks of weaker revenue growth, macroeconomic pressures, and high current valuations.

The one caveat to the earnings valuation is of course the $110 billion share buyback. This can offset some of the earnings valuation concerns but bears would be quick to point out the "financial engineering" aspect of the share repurchase.

A Deeper Dive on the Valuation Argument

The valuation comparison table provides insights into how Apple (AAPL) stacks up against its peers—Microsoft (MSFT), Nvidia (NVDA), Meta (META), Amazon (AMZN), and Google (GOOG)—across several key financial metrics.

Overall, Apple's valuation ratios generally place it in the mid-to-upper range compared to its peers. It is more attractively valued than high P/E and P/S ratio companies like Nvidia and Microsoft, yet more expensive than Meta and Google in several metrics. This suggests that while Apple is not the cheapest stock among its peers, it also isn't the most expensive, potentially offering a balanced investment profile in terms of valuation.

- P/E Non-GAAP (FY1): Apple's ratio stands at 28.87, which is lower than Microsoft (36.37), Nvidia (39.48), and Amazon (39.86), but higher than Meta (23.90) and Google (23.42).

- P/E Non-GAAP (FY2): Apple has a ratio of 26.39, which is again lower than Microsoft (32.30), Nvidia (30.48), and Amazon (31.63), but higher than Meta (20.92) and Google (20.60).

- Price/Sales (TTM): Apple has a ratio of 7.48, which is lower than Microsoft (13.51) and Nvidia (32.57), but higher than Meta (8.36), Amazon (3.31), and Google (6.57).

- EV/Sales (FWD): Apple's ratio is 7.38, which is lower than Microsoft (13.16) and Nvidia (21.57), but higher than Meta (7.51), Amazon (3.06), and Google (6.03).

- EV/EBITDA (FWD): Apple stands at 21.67, which is lower than Microsoft (24.15), Nvidia (39.84), and Amazon (20.25), but higher than Meta (17.42) and Google (19.05).

- Price/Cash Flow (TTM): Apple has a ratio of 26.35, which is lower than Microsoft (29.03) and Nvidia (64.63), but higher than Meta (15.89), Amazon (18.97), and Google (20.19).

The Price Action

The weekly technical chart for Apple (AAPL) shows a strong price action, with the stock recently pushing above its 50-week moving average, which stands at approximately $182.75. This move above the 50-week moving average indicates a potential bullish trend and suggests that the stock is gaining momentum. Additionally, the Relative Strength Index (RSI) is above 50, currently at 59.10, which indicates strength but does not suggest that the stock is overbought. This RSI level supports the view that AAPL has room to continue its upward movement without immediate risk of a pullback due to overbought conditions.

A notable resistance level is the December high of $199, which serves as a potential target for the stock if the current bullish momentum continues. The chart also highlights that AAPL has managed to hold its gains today, even as the rest of the Nasdaq experienced selling pressure. This relative strength compared to the broader market further underscores the positive sentiment surrounding Apple and its potential as a favorable investment, particularly ahead of the WWDC event.

In Conclusion

In conclusion, Apple (AAPL) represents a compelling buy ahead of its highly anticipated WWDC event. Shares of AAPL have underperformed equities as evidence by the stock being down -0.64% year-to-date compared to a 10% rise in the Nasdaq.

As a leader in the design and sale of personal computing devices, Apple offers a comprehensive ecosystem that touches all aspects of the human experience—ranging from everyday convenience with the iPhone, relaxation and entertainment with Apple TV, to productivity with the Mac and Vision Pro. This robust hardware ecosystem is complemented by Apple's rapidly growing services business, which includes an app marketplace, financial services, content offerings, and productivity apps. While the hardware business is substantial, it is the high-margin, fast-growing services sector that enhances Apple's profitability and growth potential.

Apple's unique position in the market, dominating various smart device segments, makes it difficult to compare its valuation ratios directly with other companies. However, considering the expected contraction of its P/E ratio over the next five years, the current valuation appears reasonable given the anticipated EPS growth. 

Recent criticisms about Apple's perceived lag in the AI race are being addressed with upcoming innovations, including the new iPad Pro and potential AI features in the new iOS set to be unveiled on June 10. 

Apple's $64 billion cash reserve and the largest buyback program in its history underscore its capacity to recruit top engineers, acquire promising technologies, and invest in AI development. With over 1 billion paid subscribers and the imminent rollout of AI-powered iOS 18, Apple is well-positioned for significant growth, making it a strong investment opportunity.

We recommend AAPL as a buy into its WWDC event on June 10. We would monitor a push into the $199 level for possible resistance. A break below $180-182 would raise red flags for the swing play.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.