Will New AI Integration Boost Apple Stock?

The personal electronics giant Apple (NASDAQ:AAPL) jumps off the page as the clear winner in artificial intelligence (AI). There are many ways to integrate AI into Apple’s iPhones, Watches, and other products. Wall Street has high expectations for the new iPhone 16, Apple’s first iPhone with AI capabilities.

Noted tech stock analyst Dan Ives recently estimated that 300 million iPhones worldwide are more than four years old, which heralds supercyclea period when many consumers upgraded their devices, which accelerated Apple’s growth.

But are the stocks ready for the growth investors are hoping for?

Read this before you buy Apple stock because of the AI ​​hype.

Is Apple Intelligence overrated?

Apple’s AI software, Apple Intelligence, will integrate large language models into iOS, creating new capabilities and improving existing features, including improved Siri functionality. It is under pressure to deliver a wave of iPhone improvements. But there are signs it may not live up to expectations.

First, Apple Intelligence will only be available to a limited number of customers on day one, with a beta version set to launch next month. Additional features, including non-English versions, will launch a few months later. In other words, Apple Intelligence will hit the market slowly, not in an exciting rush.

The research firm surveyed current iPhone users this summer about their upgrade plans. According to the results, 73% of respondents plan to upgrade primarily because their phones are outdated or broken — only 18% plan to upgrade for new features. The survey, conducted in June, precedes the iPhone 16’s September launch. Still, Apple introduced Apple Intelligence in early June, and AI was already making its way into Android smartphones, so it seems like AI was on people’s minds at the time.

So far, early pre-order data has been mixed. An industry analyst recently reported that early pre-orders for the standard iPhone 16 and iPhone 16 Plus were up 10% and 48%, respectively, compared to pre-order levels last year. However, the higher-end Pro and Pro Max versions were down 16% and 27%.

For now, it’s hard to call this the breakthrough supercycle Apple is hoping for.

Apple stock is priced based on AI success

If the iPhone 16 doesn’t live up to expectations, the stock price could become a problem. Below, you can see that Apple has a long history of “uneven” growth: A supercycle takes Apple to new heights, then stagnates. Apple’s last growth spurt came with the iPhone 12, the first with 5G.

Since then, Apple’s sales have plateaued. Despite this, the stock has seen a rise in valuation, likely on the assumption that AI will create another supercycle, pushing Apple to higher levels.

AAPL revenue data (TTM) by YCharts.

It’s not easy to grow profits when you’re a company big enough to generate nearly $400 billion in revenue. Apple is known for its massive stock buyback programs, but growing profits through buybacks probably won’t be enough to keep its price-to-earnings (P/E) ratio close to 35. Apple needs to exceed $400 billion in annual sales.

Is Apple stock worth buying today?

Investors should consider both sides of the coin before buying stocks today.

Let’s say Apple hits $400 billion in annual revenue and the iPhone 16 is a success. That’s fantastic! The problem is that the stock has probably already priced that growth into the price. Earnings could skyrocket, and Apple’s valuation could only fall so far. It’s hard to imagine earnings growing enough to make the stock cheap. Even if you double earnings per share, Apple’s P/E ratio is still over 17, roughly where it was before the pandemic.

On the other hand, if Wall Street sees Apple’s iPhone AI cycle as less than exceptional, the stock could fall precipitously. If the earnings needle doesn’t move significantly, Apple’s share price will have to fall drastically to calibrate its P/E ratio to a more reasonable level for a large company facing growth challenges.

Let’s assume Apple is one of the most powerful brands and companies in the world, but that doesn’t guarantee the stock will be good for you. Apple’s stock is in a precarious position, which should give investors pause before jumping on board the AI ​​hype train.

Is it worth investing $1000 in Apple now?

Before you buy Apple stock, consider the following:

This Motley Fool Stock Advisor a team of analysts have just identified what they believe is Top 10 Stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could deliver monster gains in the years to come.

Consider when Nvidia We created this list on April 15, 2005. If you invested $1,000 at the time of our recommendation, you would have $710,860!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio-building tips, regular analyst updates, and two new stock picks each month. Stock Advisor the service has more than four times S&P 500 return since 2002*.

See 10 actions »

*Stock Advisor Returns as of September 16, 2024

Justin Pope has no position in any stocks mentioned. The Motley Fool has a position in and recommends Apple. The Motley Fool has a disclosure policy.