Wall Street is betting that new AI features in iPhones, including Apple’s (NASDAQ:AAPL) integration of ChatGPT through a deal with OpenAI, will drive a massive upgrade cycle among users with older devices.
“Investors are gaining confidence that Apple is back in the competitive game and poised for growth acceleration due to the large installed base of phones needing upgrades to utilize this new technology,” said Jim Awad, senior managing director at Clearstead Advisors. “Apple will greatly benefit from AI, and the stock is reflecting this optimism.”
The top stocks on Wall Street have quickly shifted due to AI enthusiasm. On Thursday, Apple overtook Microsoft Corp. as the largest company by market capitalization. Earlier this week, Apple was third behind Nvidia Corp and Microsoft, with Nvidia holding the top spot at $3.2 trillion and Microsoft leading since January.
Apple is on track for its largest one-week percentage gain since 2021, reaching a new record high. Since hitting a low in April, the stock has gained more than $700 billion in market value. Buy ratings on Apple are near their highest levels since 2017.
While Apple’s recent event was light on surprises, it alleviated some concerns that had weighed on the stock this year. Wall Street was worried about Apple’s perceived lack of an AI strategy, particularly as its growth lagged behind other megacaps and its valuation remained high. These concerns had limited share-price gains, with only Tesla Inc. performing worse among the Magnificent Seven, down 27%.
Apple’s revenue fell 4.3% in its fiscal second quarter, marking the fifth decline in the past six quarters. Despite this, Apple trades at about 30 times estimated earnings, above its long-term average and the approximately 27 times multiple of the Nasdaq 100 Index.
The iPhone remains Apple’s largest business, accounting for more than half of its fiscal 2023 revenue, according to Bloomberg data. However, iPhone revenue fell 2% last year, reflecting how many users are holding onto their phones longer. Bulls argue that AI represents the must-have feature that will prompt these users to upgrade.
“People who were initially unenthusiastic about the announcement are now becoming believers that AI will drive the next cycle of iPhone sales,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “While it will take time to see confirmation in the numbers, AI has the potential to create growth that makes the stock look undervalued.”
The pool of users potentially in the market for an upgrade is substantial. Bloomberg Intelligence estimates that over 40% of Apple’s 800 million-plus smartphones are iPhone 12 or older, with another 27% using an iPhone 13. Fewer than 10% of current users have phones capable of upgrading to the AI software.
“Older devices will become 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, which could result in iPhone revenue growth of about 20% for up to two years.”
The prospect of an iPhone refresh cycle has also boosted Apple suppliers. Skyworks Solutions Inc. is up 17% this week, marking its biggest one-week percentage gain in four years, while Cirrus Logic Inc. has hit record highs. Qorvo Inc. is experiencing its best week since 2020.
The integration of features such as enhanced search, photo editing, and text generation “will drive much broader adoption of AI than we’ve seen to date,” wrote D.A. Davidson analyst Gil Luria, who upgraded his rating to buy. “Apple is uniquely positioned to offer these capabilities and may be the only company capable of doing so in the near future.”
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The massive size of Apple, Microsoft, and Nvidia is a key reason why tech has become so dominant in equity indexes. The S&P 500’s tech sector represents a staggering 32.6% of the overall benchmark index, the highest ratio since 2000, around the dot-com era, and up from a recent low of less than 29% in April. These three $3 trillion stocks together account for about 21% of the S&P 500.
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