Apple has US$230 billion week on bet AI iPhones are must-haves

Apple investors finally have a roadmap for how it will use artificial intelligence (AI) – and they’ve responded by pushing the stock to a record high this week. 

Wall Street is betting that new iPhone AI features – including Apple’s agreement with OpenAI to integrate ChatGPT – will spur a massive upgrade cycle among users who have been holding on to older devices. 

Investors have “more confidence that Apple is back in the game, that it has caught up competitively, and that it will see a re-acceleration of growth, given the installed base of phones that will need to upgrade to take advantage of this new tech”, said Jim Awad, senior managing director at Clearstead Advisors. “Apple will be a major beneficiary of AI, and the stock is catching up.”

The iPhone maker’s shares fell on Friday (Jun 14), but still managed to close the week with a nearly 8 per cent advance, the stock’s best since May. The rally added about US$239 billion in market value and pushed Apple back into record territory for the first time since December. 

Wall Street’s top stocks have quickly re-shuffled on AI optimism. Apple on Thursday overtook Microsoft as the biggest company by market capitalisation. Apple was third-largest as recently as Monday, trailing behind US$3.2 trillion Nvidia, and Microsoft, which held pole position since January. 

While seen as short on surprises, Apple’s event eased concerns that have weighed on the stock this year. Wall Street had fretted that the firm lacked an AI strategy, especially since its growth has been wanting compared with other megacaps, and its valuation is elevated. That has kept a lid on share-price gains; among the Magnificent Seven, only Tesla – down 28 per cent – has seen a weaker performance.

Revenue fell 4.3 per cent in Apple’s fiscal second quarter, the fifth contraction in the past six quarters. Despite that, it trades at about 30 times estimated earnings, above its long-term average and the roughly 27 times multiple of the Nasdaq 100 Index.

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 per cent last year, a reflection of how millions are holding onto their phones for longer. AI, bulls argue, represents the kind of must-have features that will prompt them to trade up.

“People who weren’t excited about the initial announcement are fast becoming believers that AI is the innovation that will spur the next cycle of iPhone sales,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “We have to be realistic, and it will take time to see confirmation in the numbers, but AI has the potential to create the kind of growth that will make the stock look cheap.”

The pool of users who might be in the market for an upgrade is potentially massive. According to Bloomberg Intelligence, over 40 per cent of Apple’s 800 million-plus smartphone devices are iPhone 12 or older, with another 27 per cent of users on an iPhone 13. Fewer than 10 per cent of current users have phones that can be upgraded to the AI software.

“Older stuff will be obsolete if you want AI,” wrote Melius Research analyst Ben Reitzes. Given the allure of AI, “we now have more conviction in our Super Cycle thesis that could even result in iPhone revenue growth of about 20 per cent for up to two years”.

The prospect of an iPhone refresh cycle has also lifted Apple suppliers. Skyworks Solutions is up 15 per cent this week, its biggest one-week percentage gain in four years, while Cirrus Logic hit a record Thursday. Qorvo is seeing its best week since 2020.

The integration of features such as enhanced search, enhanced photo editing and text generation “will drive much broader adoption of AI than we have seen to date”, wrote DA Davidson analyst Gil Luria, who raised his rating to buy. “Apple is uniquely positioned to offer these capabilities, and may be the only one capable of doing so any time soon.” BLOOMBERG