Apple Inc. investors finally has a roadmap for how it will use artificial intelligence – and it’s responded by pushing stocks towards their best week in more than two years.
Wall Street is betting that the iPhone’s new AI features — including Apple’s deal with OpenAI to integrate ChatGPT — will spur a massive upgrade cycle among users using older devices.
Investors are “more confident that Apple is back in the game, that it has caught up competitively and will see growth return, as installed base will need to increase level to take advantage of this new technology. said Jim Awad, senior managing director at Clearstead Advisors. “Apple will be a big beneficiary of AI and the stock is catching up.”
Wall Street’s top stocks quickly reversed optimism about AI. Apple on Thursday surpassed Microsoft Corp. to become the largest company by market capitalization. Apple ranked third as recently as Monday, behind $3.2 trillion Nvidia Corp. and Microsoft, which has held the top spot since January.
The iPhone maker is poised for its biggest one-week percentage gain since 2021, climbing to a new record high. Since its April low, this stock has added more than $700 billion in market value. The buy rating on the stock is at its closest since 2017.
While not considered much of a surprise, Apple’s event eased concerns that have weighed on stocks this year. Wall Street has been worried that the company lacks an AI strategy, especially since its growth lags behind other large-cap companies and its valuation is inflated. That has limited stock price gains; Among the Magnificent Seven, only Tesla Inc. – 27% reduction – has weaker performance.
Revenue fell 4.3% in Apple’s fiscal second quarter, its fifth decline in the past six quarters. Even so, it trades at about 30 times estimated earnings, above its long-term average, and about 27 times the Nasdaq 100 index.
According to data compiled by Bloomberg, the iPhone is by far Apple’s largest business, accounting for more than half of its fiscal 2023 revenue. However, iPhone sales fell 2% last year, reflecting that millions of people are holding on to their phones longer. Bulls argue that AI represents the kind of must-have feature that will motivate them to trade.
“Those who were not excited by the initial announcement are quickly becoming convinced that AI is the innovation that will drive the next iPhone sales cycle,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. according to”. “We have to be realistic and it will take time to see confirmation of the numbers, but AI has the potential to create the kind of growth that makes stocks look cheap.”
The pool of users who might want to upgrade can be very large. According to Bloomberg Intelligence, more than 40% of Apple’s more than 800 million smartphone devices are iPhone 12 or later, with another 27% of users using iPhone 13. Less than 10% of current users have phones that can Upgrade to AI software.
“Older things will be obsolete if you want AI,” writes Melius Research analyst Ben Reitzes. With the appeal of AI, “we now have more confidence in our Super Cycle thesis, which could even help iPhone revenue grow around 20% for up to 2 years.”
The prospect of an iPhone refresh cycle has also boosted Apple’s suppliers. Skyworks Solutions Inc. rose 17% this week, its biggest one-week percentage gain in four years, while Cirrus Logic Inc. has reached a record. Qorvo Inc. is seeing its best performing week since 2020.
“Integrating features like advanced search, advanced photo editing and text generation “will drive AI adoption,” wrote DA Davidson analyst Gil Luria, who upgraded his buy rating. much more widespread than what we have seen so far.” “Apple is uniquely positioned to deliver these capabilities and may be the only one with the ability to do so soon.”
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The massive scale of Apple, Microsoft and Nvidia is the main reason technology has become so dominant in equity indexes. The S&P 500’s technology sector makes up 32.6% of the overall benchmark index. That’s the highest ratio since 2000, during the dot-com era, and up from a recent low of less than 29% from April. The trio of $3 trillion stocks together account for about 21% of the S&P 500 .
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