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It took decades for research firm MoffettNathanson to launch a study into the world's most valuable companies, but the company did so this week, announcing that its approach to building artificial intelligence into its devices means it is “well positioned to win” the AI wars.
What's interesting is that, as MoffettNathanson pointed out in a 72-page research note published Monday, this win is already priced into the stock price, which is up about a quarter from its mid-April lows at about $225 a share. For a company with a market capitalization of more than $3.4 trillion, this is already a huge boost in shareholder value.
Apple shares have seen a dramatic rise in 2024, rising 24% from mid-April through Monday.
(Graph from Yahoo Finance)
What caused the surge? At Apple's Worldwide Developers Conference in early June, the company confirmed the tech industry uproar of the past few months: Apple will build AI capabilities into its operating systems and programs, especially its mobile ones, in a way that protects customer privacy and data. AI will be ubiquitous, but it will become an organic part of the everyday experience of using computers that we carry everywhere.
“By the time of WWDC in June, the broad outlines of Apple's 'context-aware' AI strategy were already well anticipated by the tech public and the market,” MoffettNathanson analysts, led by Craig Moffett, wrote.
Any significant improvements in everyday capabilities for iPhone users would force a massive upgrade cycle to new smartphones because only the two latest top-end models (iPhone 15 Pro and 15 Pro Max) would benefit from them. Eventually, Apple will likely charge for the more powerful versions of its AI software, as Open AI and many other AI companies already do.
If the company continues with its usual rollout pattern for new iPhones and OS updates, the AI-enabled versions will start arriving in mid-September, though some AI features won't be available until several months later.
Still a hardware giant, but with a highly profitable services division that now generates nearly $100 billion in annual profits, the potential gold mine of Apple's AI deployment sounded very appealing to the market. The stock price soared.
Indeed, the analysts wrote, the story Apple can tell about its AI approach, which it has now cleverly renamed “Apple Intelligence,” is so compelling and widely accepted that there is little room for further stock price gains in the near future.
“The case for investing in Apple hinges on a simple question: can Apple 'win' at AI?,” MoffettNathanson wrote. “It's an easy question to ask, but not so easy to answer.”
Analysts have set a target price of $211 for Apple shares, $14 lower than the company's slightly lower closing price on Monday. Analysts have a “neutral” rating on the stock, which is the equivalent of a “hold.”
Maybe they just don't share the sentiment that a modern-day Alan Greenspan might condemn the market's irrational exuberance about the prospects for further growth in stock prices — and that's despite their own relatively high expectations.
“In many cases, our forecasts are above consensus,” the analysts wrote. “However, the sell-side consensus does not fully capture the level of optimism priced into Apple's current price multiple. There are already aggressive terminal growth assumptions priced into Apple's stock price that appear to be much more generous than the sell-side forecasts suggest.”
Apple certainly has big advantages: a billion Apple device owners, for example, who are deeply entrenched in a powerful ecosystem of interconnected device software and hardware.
The company has laid out a significant and historically consistent approach to protecting customer data and privacy through a series of tactics, including keeping most queries on the phone or anonymizing them and storing them on Apple's private servers. This approach will come as comfort to users concerned about the potential misuse of theoretically unlimited AI services offered by companies with uncertain pedigree and trustworthiness.
The market is also excited about the possibility that a high-end version of the digital assistant could eventually be released, with a market price tag of, say, $20 per month. The arrival of such a super-assistant within Apple's ecosystem could provide an even bigger boost to the company's services division.
But MoffettNathanson noted that Apple's compelling story of appearing “well poised to win” the AI war faces serious challenges that should temper enthusiasm at least a little.
Perhaps the most obvious is just how big the iPhone upgrade cycle will actually be, which analysts have likened to the “super cycle” of the early 2010s, when millions of people traded in their older phones for models that could receive the much faster 5G networks rolling out in 2021 and 2022.
“There are many reasons why aligning the AI upgrade cycle with the (5G) cycle will be difficult, and a combination of regulatory hurdles and geopolitical considerations will likely constrain Apple's AI deployment and adoption, particularly outside the U.S.,” MoffettNathanson wrote. “But Apple's current valuation is already significantly higher than it will be in the 5G cycle.”
Apple's troubles in China, its largest market, where it fell 10 percent earlier this year, may not be limited to the fact that Huawei and other Chinese-made phones could fall behind in consumer ratings, especially if iPhones aren't as AI-enabled as they are in other markets.
In addition, the company is facing strong opposition from regulatory authorities in the United States and EU on various fronts, which is having a significant impact on the company's App Store profits, etc.
Apple may also be affected by increased regulation affecting rival/supplier Alphabet's Google: Recent U.S. antitrust rulings regarding Google's dominance in search could force the company to stop paying Apple more than $20 billion a year to be the default search engine on iPhones and other devices.
While this may be a “don't throw me in the thorny bush” moment for Google, it will be a huge hit to Apple's profit margins.
Google also tried to get ahead of Apple's AI rollout last week by releasing its own Gemini AI intelligence tool on its Android operating system, which it promoted heavily, including during television coverage of the Paris Olympics. Whether this too poses a fatal threat to Apple Intelligence's potential market dominance could be another reason for the cooling of enthusiasm for the world's most valuable company.
