Apple Inc.’s (NASDAQ:AAPL) recent surge in stock price has raised doubts about whether its artificial intelligence strategy justifies the high valuation.
Market Reactions and Skepticism
Last week, Apple shares hit a new all-time high, briefly reclaiming the title of the world’s most valuable company from Microsoft Corp. This spike followed the announcement of new AI features that investors hope will drive a significant upgrade cycle among users.
However, the stock’s valuation, now around 30 times forward earnings, is a level it has struggled to maintain historically. While investors are excited about potential faster revenue growth and higher returns, there are still questions about when these benefits will materialize.
“I hope the market is right, but so far we haven’t seen enough to be sure,” said David Daglio, chief investment officer at TwinFocus Capital Partners LLC. “I wouldn’t put new money to work here. The risk-reward is negative at best.”
Timing and Growth Expectations
The timeline for Apple’s AI strategy to significantly boost revenue is crucial. The rollout of new AI features may extend into 2025, slower than investors would like. Despite this, the stock rose by as much as 1.1% on Friday morning.
Wall Street anticipates that Apple’s revenue growth will pick up in the second half of 2024, ending the year at just 1% growth before accelerating to 7% in 2025. In the iPhone segment, revenue is expected to decline in the last two quarters of 2024 compared to the same period in the previous year.
Valuation Concerns
Rising valuations are a major concern for investors considering the next phase of the AI rally. Besides Apple, record highs in shares of Microsoft and Nvidia Corp. have lifted the broader market, but also increased price-to-earnings ratios. Microsoft trades at about 34 times forward earnings, while Nvidia trades at 43 times. The Nasdaq 100 index trades at about 27 times forward earnings.
Some analysts believe Apple shares still have room to grow. JPMorgan analysts, led by Samik Chatterjee, recently raised their price target to $245 from $225, citing that new AI features should initiate an iPhone upgrade cycle and boost earnings.
Alternative Opportunities
However, some investors are cautious. Nancy Tengler, CEO at Laffer Tengler Investments Inc., has removed Apple from her best ideas list due to its high valuation.
“There’s more growth visibility in other names, like Microsoft, Amazon, Oracle, and Broadcom,” she said. “There are other opportunities we’re taking advantage of, and places where valuations aren’t as stretched.”
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