Can AI Launch Drive Apple Stock To $300?

Apple (NASDAQ:AAPL) stock rallied by close to 7% in Tuesday’s trading, after the company unveiled a slew of artificial intelligence-focused features for its iPhones, iPads, and Macs.  The company is calling the new tools Apple Intelligence and is pitching the features as AI for everyday users.  Although Apple has avoided making big announcements on the AI front over the past year, unlike rivals such as Microsoft and Facebook,  Apple’s new generative AI offerings – which include upgrades to its Siri voice assistant, writing assistance tools, calculators, and image processing tools – appear very well implemented and could drive a big upgrade cycle for Apple’s iDevices. So how will the new upgrades drive Apple stock?

Apple is only offering the new AI tools on its higher-end devices to begin with. This is likely because many of the features require higher-power processing capabilities and use more on-device computing, potentially helping to keep users’ data private. For instance, the new AI assistant will only run on iPads and Macs with M1 and later chips. The only iPhones that support AI are the iPhone 15 Pro and Pro Max, which are equipped with the A17 Pro chip. For perspective, the cheapest iPads that support Apple AI cost about $600, which the number jumps to $1000 for the iPhone Pro. While we think it’s very likely that Apple will bring AI to more new devices in future product launch cycles, it’s safe to assume that the vast majority of Apple consumers, especially iPhone users, will need to upgrade devices to get access to AI capabilities. The compatible iPhone models likely account for well below 10% of Apple’s total iPhone installed base. This should lift Apple’s sluggish iPhone and iPad businesses, which have seen little growth in recent years. For perspective, iPhone sales rose by about 7% in FY’22 and declined by -2.5% in FY’23 and are likely to see a slight drop this fiscal year as well. The iPad is on track for its third straight year of revenue declines. Apple’s new iPhones are due to be launched in the fall, while the company recently refreshed its iPad lineup.

Apple’s margins could also benefit from the generative AI launch. Besides helping the company sell more high-end devices, which have better profits, Apple could also drive incremental sales for its services businesses, by eventually offering more AI-focused subscription offerings. Moreover, unlike other big tech players who are dependent on building out massive cloud infrastructure and investing billions into graphical processing units to run large language models, Apple’s strategy of using on-device processing for many tasks in addition to cloud processing could reduce the company’s capex outlays versus other generative AI players. Apple currently has the best in class mobile processors which give it an advantage in more personalized, end-point AI applications.

AAPL stock has seen strong gains of 60% from levels of $130 in early January 2021 to around $205 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in AAPL stock has been far from consistent. Returns for the stock were 35% in 2021, -26% in 2022, and 49% in 2023. In comparison, Arista Networks (NYSE:ANET), another company that also benefits from generative AI, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Now, will Apple stock rally further going forward?

We value Apple at about $202 per share, which is roughly in line with the current market price. Apple stock trades at about 31x FY’24 earnings, a bit higher than historical levels. However, Apple should see revenue growth pick up from the next fiscal year, driven by the generative AI trend. Margins are also likely to pick up, driven by a more favorable product mix skewed toward high-end devices, service sales, and lower component costs. See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

[1] Returns as of 6/12/2024
[2] Cumulative total returns since the end of 2016

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