How Apple Became an AI Stock

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Hello. I don’t like writing about politics and I doubt there’s much geopolitical alpha in the markets, which are very good at discounting political news. But between what we learned last week about Biden’s mental capacity and what we learned yesterday about France’s political transformation, I may have to write something about the impact of politics on markets before long. Send me a good angle: robert.armstrong@ft.com

Apple gets an AI halo

Since May 1, Apple shares have risen 24%, adding more than $600 billion to the market value. Only Nvidia has gained more value; Microsoft is a distant second. It seems that Apple has become—perhaps in reality, or perhaps only in appearance—an artificial intelligence stock.

Over the past two months, expectations for Apple’s financial results have increased, but not short- or even medium-term expectations. There is virtually no change in the estimates for this year or for 2025, neither in terms of revenues nor in terms of profits. We have to look to 2026 and 2027 to see a change in analyst expectations. For 2027, expectations for revenue and profit growth have increased by four and eight percentage points, respectively, since the beginning of May. It’s a lot. The chart below shows Apple’s earnings growth in 2022 and 2023, as well as growth expectations for the coming years, as they were two months ago and as they are today:

I’m not sure I can take analysts’ earnings estimates three years from now seriously, other than as expressions of enthusiasm or the opposite. It should be noted, however, that even the sharp rise in estimates for the next three years is not enough on its own to explain Apple’s price action. The valuation has been accompanied by a substantial increase, on top of the increase in estimates. Expectations are high by any measure, as evidenced by the fact that Apple’s valuation premium to the S&P 500 has risen to the top of its recent range (even as the S&P’s valuation has continued to rise).

What events in the past two months could explain the changes in prices, estimates, and valuations? There are two possible hypotheses. One is the better-than-expected first-quarter earnings report on May 2nd, followed by a rally in the stock price. Revenue fell in the first quarter, but not as much as expected. Dividend and share buyback announcements were larger than expected. Solid financial news, but not much more than that.

Then there’s the June 10 announcement of a partnership with OpenAI, which will power a new feature, “Apple Intelligence,” on iPhones and other devices. Tying Apple’s name to the company that produced ChatGPT, the first of the truly impressive big general-purpose language models, is a big deal. The advertised capabilities of Apple Intelligence, unlike what we already know LLMs can do, are not. Proofreading and editing tools; emoji customization, image creation, better language interpretation for the Siri digital assistant, all with Apple’s usual privacy promises. None of this seems likely to spark a device upgrade cycle among consumers.

Perhaps all that mattered was showing that Apple was in the game, integrating AI technology into its devices so that they would be ready when that killer app appeared. After all, Apple’s strength lies in perfecting rather than developing new technologies. It makes sense that when and if consumer applications for AI flourish, Apple could create some of the most useful versions of them, given the power of its user interfaces and its enormous network of captive users.

Apple is comparable in this respect to Meta, Microsoft and Alphabet. All three are linked by the assumption that the economic strength and market position of their historic businesses guarantees them a strong position in what is fundamentally a new and potentially very different sector, AI.

We’ve seen evidence that AI can do some very impressive things in information processing. From a profit perspective, however, all we’ve seen are huge chip sales for Nvidia (and a few others to a lesser extent) and a number of companies whose valuations have improved thanks to the aura of AI. We don’t know what AI-based businesses will look like – outside of those that provide the computing power that AI needs. So the simple fact that Apple can add hundreds of billions of dollars to its value is a very good indication that we are in a bubble.

There are two types of bubbles. The first is a speculative frenzy around an idea or technology whose value is fundamentally overestimated. Tulips and, in my view, cryptocurrencies fall into this category. Then there are bubbles that form around objects of great value, before the financial and competitive structure around those objects is understood. The railroad, telecom, and dot.com bubbles fall into this last category. So does AI.

A good read

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