(Bloomberg) — Every big tech company is trying to convince Wall Street that it can be a major player in artificial intelligence, and few are doing it better than Apple.
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Analysts are betting that the AI-enabled iPhone, unveiled in June, will encourage consumers who have been holding on to older models for years to upgrade their phones, bringing a much-needed return to growth for Apple. At least five companies have raised their valuations since then, with Loop Capital being the latest to get bullish in the face of lofty valuations.
Igor Tysin, an analyst at Harding Loebner LP who rates Apple a Buy, said Apple has “made a great play” with AI since appearing to fall behind last year. “I don’t know how much they’ll be able to monetize in the short term, but I think AI could be a big value driver for Apple in years two and three, once they get past the first step.”
Loop analyst Ananda Baruah agrees, expecting AI to significantly increase demand for iPhones. “Apple has an opportunity to solidify its position as the ‘basecamp’ consumer choice for first-generation AI over the next few years, just as it solidified its position for social media with the iPhone 15 years ago,” he wrote in a note. Loop’s upgrade raises Apple’s consensus recommendation (a ratio of buy, hold, and sell ratings) to 4.2 on a 5-point scale, its highest since November.
A device upgrade cycle would make sense: iPhones are Apple’s largest business, accounting for more than half of its revenue in fiscal 2023, according to data compiled by Bloomberg. But iPhone revenue fell 2% last year, suggesting that battery and camera improvements in the iPhone 14 and 15 models weren’t enough to lure customers.
AI capabilities, including the ChatGPT integration deal with OpenAI, could change that. According to Bloomberg Intelligence, more than 40% of Apple’s 800 million smartphone users own iPhone 12 or older devices, and another 27% are using the iPhone 13. Fewer than 10% of current users have smartphones that can be upgraded to AI software.
The positive reaction to the AI event has driven Apple’s stock price up 36% from its April low, adding roughly $900 billion to its market cap and restoring it to its position as the largest stock in the world. This has also boosted its valuation to an all-time high, which represents a big stake for the broader market given the high expectations for AI and Apple’s large weighting in the index.
Apple shares currently trade at more than 31 times forward earnings, more than 50% above its average over the past decade and near its highest price since early 2021, when the company was growing much faster and interest rates were much lower.
Some see the market over-hyping the potential benefits of AI, especially since it can take time for upgrade cycles to materialize after a phone is launched.
“ChatGPT is exciting, Gemini is exciting, but are they really influencing consumer purchasing decisions? I think it’s a little too early to be that confident.”
Similarly, UBS said the anticipated “AI supercycle” is “unlikely to occur” and argued that optimism about future growth is misplaced.
“Our analysis of regional smartphone demand, historical cycles, income bracket data and carrier subsidies suggests that next year’s cycle will be milder,” wrote analysts led by David Vogt, who have a Neutral rating on the stock.
Despite the recent upgrades, Wall Street remains a little more skeptical of Apple than other big tech stocks: Fewer than 70% of analysts recommend buying the stock, compared with closer to 90% or more for Microsoft Corp., Amazon.com Inc. and Nvidia Corp. And the stock is already trading above analysts’ average price target, suggesting that AI hype may have subsided for now.
Still, the AI opportunity will become clearer next year: Wall Street expects Apple’s revenue to grow just 1.1% in fiscal 2024, accelerating to 7.7% in fiscal 2025. In terms of profits, Apple is expected to grow 7.8% this year and 10.5% next year.
That’s still less than the Magnificent Seven. That group’s revenue is expected to grow 9.5% this year and accelerate to 12.2% in 2025, according to Bloomberg Intelligence, and the mega-cap cohort is also expected to fare better on the profit front.
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