Analysts are increasingly agreeing that the AI-enhanced iPhone, revealed in June, will drive a significant upgrade cycle as consumers replace their old devices, revitalizing Apple’s (NASDAQ:AAPL) growth trajectory. Since the announcement, at least five firms have raised their ratings, with Loop Capital recently joining the bullish outlook, even as Apple’s valuation has climbed to new heights.
Igor Tishin, an analyst at Harding Loevner LP who rates Apple a buy, commented on the strategic move: “Apple is playing it brilliantly with AI after seeming behind last year. Immediate monetization may be limited, but AI will add significant value in the next few years.”
Loop analyst Ananda Baruah echoed this sentiment, predicting a substantial increase in iPhone demand driven by AI. “Apple has the chance to establish itself as the go-to platform for consumer AI, similar to its dominance in social media with the iPhone 15 years ago,” he wrote. Loop’s upgrade raised Apple’s consensus recommendation to 4.2 out of five, the highest since November.
An upgrade cycle would be crucial for Apple, whose iPhone sales represent more than half of its fiscal 2023 revenue, according to Bloomberg data. Despite this, iPhone revenue declined by 2% last year, indicating that enhancements in the iPhone 14 and 15 models weren’t enough to spark widespread consumer upgrades.
AI features, including a collaboration with OpenAI to integrate ChatGPT, could be the catalyst for change. Bloomberg Intelligence reports that over 40% of Apple’s 800 million-plus smartphone users have iPhone 12 or older models, and another 27% have iPhone 13. Less than 10% of current users have phones compatible with the new AI software.
The positive reception to Apple’s AI event has driven a 36% increase in shares since April, adding approximately $900 billion to Apple’s market capitalization and restoring its position as the world’s largest stock. This surge has pushed Apple’s valuation above historical norms, reflecting high expectations for AI and significant implications for the broader market given Apple’s heavy weight in indexes.
Currently, Apple shares trade at more than 31 times estimated earnings, over 50% higher than their 10-year average, and near the peak since early 2021 when the company was experiencing faster growth and lower interest rates.
Some experts caution against overestimating AI’s immediate impact, especially as it might take time for the upgrade cycle to gain momentum after the phones launch.
“ChatGPT and Gemini are exciting, but are they really driving consumer purchases yet?” questioned Matt Stucky, chief equity portfolio manager at Northwestern Mutual Wealth Management. “It’s a bit early to be that confident.”
UBS also expressed skepticism, suggesting that the anticipated “AI supercycle” is unlikely, and that growth expectations might be overly optimistic.
“Our analysis of smartphone demand by region, previous cycles, income data, and carrier subsidies points to a more moderate upgrade cycle next year,” wrote UBS analysts led by David Vogt, who maintain a neutral rating on Apple.
Apple Has Less Buy Ratings Than Other Big Tech Stocks
Despite recent upgrades, Wall Street is more cautious about Apple compared to other major tech stocks. Less than 70% of analysts recommend buying Apple, whereas buy ratings for Microsoft Corp., Amazon.com Inc., and Nvidia Corp. are near or above 90%. Moreover, Apple shares have already surpassed the average analyst price target, suggesting that AI enthusiasm might have peaked for now.
Nonetheless, the potential of AI is expected to become clearer next year. Wall Street predicts Apple’s revenue will grow by just 1.1% in fiscal 2024, with an acceleration to 7.7% in fiscal 2025. Earnings are forecasted to grow by 7.8% this year and 10.5% next year.
However, this growth rate is still below that of the Magnificent Seven. Bloomberg Intelligence projects that this group’s revenue will increase by 9.5% this year, accelerating to 12.2% in 2025, with the megacap tech cohort also expected to outperform in earnings.
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