(Bloomberg) -- All big tech companies are trying to convince Wall Street that they’ll be a major player in artificial intelligence. Few have done as good a job as Apple Inc.
There’s growing consensus among analysts that an iPhone with AI features, unveiled in June, will spur consumers to upgrade their phones after holding onto older models for years, giving Apple a long-awaited rebound in growth. At least five firms have raised their ratings since the event, with Loop Capital the latest to turn bullish in the face of a valuation that has risen to elevated levels.
Apple “is playing it brilliantly” with AI after seeming like it was behind the curve last year, said Igor Tishin, an analyst at Harding Loevner LP who rates Apple a buy.
“I don’t know how much monetization there will be in the near term, but beyond the first step, I think AI can help Apple develop tremendous value in years two and three.”
Loop analyst Ananda Baruah agrees, expecting AI to drive a material increase in demand for iPhones. “Apple has an opportunity the next few years to solidify itself as consumer’s Gen AI ‘base camp’ of choice, just as it did for social media 15 years ago with iPhone,” he wrote in a note.
Loop’s upgrade brought Apple’s consensus recommendation — a ratio of its buy, hold, and sell ratings — to 4.2 out of five, the highest since November.
A device upgrade cycle would be meaningful. The iPhone is by far Apple’s biggest business, accounting for more than half its fiscal 2023 revenue, according to data compiled by Bloomberg.
However, iPhone revenue fell 2% last year, indicating that battery and camera improvements in the iPhone 14 and 15 models weren’t enough to entice customers.
AI features, including an agreement with OpenAI to integrate ChatGPT, could change that.
According to Bloomberg Intelligence, more than 40% of Apple’s 800 million-plus smartphone users have iPhone 12 or older devices, while another 27% are using an iPhone 13. Fewer than 10% of current users have phones that can be upgraded to the AI software.
The positive response to the AI event has contributed to a 36% surge in the shares since an April low, adding about $900 billion to Apple’s market capitalization and returning it to its position as the largest stock in the world. That’s also pushed the valuation above historical levels, indicating high hopes for AI — and high stakes for the broader market, given Apple’s massive weighting in indexes.
Apple shares are currently trading at more than 31 times estimated earnings, more than 50% above their 10-year average, and near the highest level since early 2021, when the firm was growing much faster and interest rates were much lower.
Some see the market over-hyping the potential gains from AI, especially as it may take time for an upgrade cycle to materialize after the phones become available.
“ChatGPT is exciting, Gemini is exciting, but are they really influencing consumer purchase decisions yet?” said Matt Stucky, chief equity portfolio manager at Northwestern Mutual Wealth Management. “I think it’s a little bit too early to have that kind of conviction.”
Along similar lines, UBS argued that a hoped-for “AI supercycle” was “not likely,” and that optimism for future growth was misplaced.
“Our analysis of smartphone demand by region, prior cycles, income demographic data, and carrier subsidies argues for a more modest cycle next year,” wrote analysts led by David Vogt, who have a neutral rating on the stock.
Even with the recent upgrades, Wall Street is somewhat more skeptical about Apple than other megacap tech stocks. Fewer than 70% of analysts recommend buying the stock, compared with ratios near or above 90% for Microsoft Corp., Amazon.com Inc., and Nvidia Corp. And shares have already gotten ahead of the average analyst price target, suggesting that AI excitement may have run its course for now.
Still, the AI opportunity is likely to become clearer next year. Wall Street expects Apple revenue will grow just 1.1% in its 2024 fiscal year before accelerating to 7.7% in fiscal 2025.
For earnings, Apple is expected to show growth of 7.8% this year and 10.5% next.
That’s still less that the Magnificent Seven. According to Bloomberg Intelligence, revenue for that group will rise 9.5% this year and accelerate to 12.2% in 2025, while the megacap cohort is also expected to outperform on earnings.
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