$Apple (AAPL.US)$Investors finally have a roadmap for how the company will use AI. In response, investors have pushed Apple's stock to its best single-week performance in over two years. Since the beginning of the week, Apple's stock has risen nearly 9% and exceeded Microsoft and become the world's most valuable company again on Thursday. Meanwhile, as of Monday, Apple was still behind Microsoft and ranked third in global market cap. At the same time, Apple's market cap has increased by over $700 billion since hitting bottom in April. Its "buy" rating is also nearing its highest level since 2017. $Microsoft (MSFT.US)$Apple, which had fallen behind Microsoft and Amazon, regained its position as the world's most valuable company.$NVIDIA (NVDA.US)$Since April, Apple's market cap has increased by over $700 billion and is nearing its highest "buy" rating since 2017.
Wall Street is betting that Apple's new AI functionality for the iPhone, including integration with ChatGPT from OpenAI, will trigger a large upgrade cycle among users who have been holding onto their old phones. Jim Awad, Senior Managing Director at Clearstead Advisors said, "Investors are increasingly confident that Apple is back in the game and that the company is catching up in the competition." He added that considering the need to upgrade hardware to utilize AI technology, the market will see a reacceleration in iPhone sales growth and "Apple will be a major beneficiary of AI and its stock is catching up."
Although the upcoming World Wide Developer Conference (WWDC24) in 2024 for Apple was seen as lacking surprises, it eased worries that have plagued the company's stock this year. Wall Street had been concerned about Apple's lack of an AI strategy, especially compared to other tech giants where progress in AI has been slow. On the other hand, the company's high valuation with a P/E ratio of around 30, higher than the long-term average, and higher than the Nasdaq 100 index's P/E ratio of about 27, has limited the rise of Apple's stock. Since the beginning of this year, Apple's stock has only risen by about 12%, second worst among the "Big Seven" US tech giants, only better than Tesla's (TSLA.US) 27% decline since the beginning of this year.
The iPhone is the main contributor to Apple's revenue, accounting for more than half of the company's revenue in fiscal year 2023. However, iPhone revenue in fiscal year 2023 decreased by 2%, reflecting the prolonged replacement cycle for millions of users.
With the introduction of AI capabilities, bulls believe this will prompt these older iPhone users to upgrade their hardware. Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, said, "Those who weren't interested in the initial announcement from Apple are now quickly believing that AI will provide the innovation to drive the next wave of iPhone sales." "We have to be realistic that performance confirmation will take time, but AI may generate growth that makes the shares look cheap."
The demographic of iPhone users who may need to upgrade their hardware is very large. Bloomberg Intelligence said that out of Apple's 800 million plus iPhones, over 40% are iPhone 12 or older, and another 27% of users use the iPhone 13, while fewer than 10% of users currently have phones that support AI software (i.e., iPhone 15 Pro, iPhone 15 Pro Max).
Ben Reitzes, analyst at Melius Research, said that given the appeal of AI, "We are more confident in our super cycle theory now, which could drive iPhone revenue growth up around 20% over the next couple of years."
Gil Luria, analyst at D.A. Davidson, upgraded his rating on Apple to "buy." The analyst said that the integration of enhanced search, enhanced photo editing, and text generation functions "will expand the application of AI more widely than we have seen so far," and "Apple is uniquely positioned to offer these features and may be the only company capable of doing so in the near future."