How Apple Became an AI Stock

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Good morning. I don't like writing about politics and I don't see much geopolitical alpha in a market that values ​​political information. But given what we learned last week about Biden's mental ability and yesterday about the French upheaval, I may have to write something about the impact of politics on markets soon. Please send me your thoughts: robert.armstrong@ft.com

Apple Wins AI Ring

Since May 1, Apple shares have risen 24%, adding more than $600 billion to its market cap — only Nvidia is worth more, with Microsoft a distant third. It looks like Apple has become an AI stock (perhaps in reality, or maybe just in appearance).

Expectations for Apple's performance have risen over the past two months, but not for the short- or mid-term future. Revenue and profit forecasts for this year and 2025 are essentially unchanged. To see how analysts' expectations have changed, we need to look ahead to 2026 and 2027. Expectations for 2027 revenue and profit growth have increased by 4 and 8 percentage points, respectively, since early May. That's a big jump. The chart below shows Apple's 2022 and 2023 profit growth as of two months ago and now, as well as growth expectations for the next few years.

It's hard to know how seriously to take analysts' three-year outlooks, whether they're simply expressions of enthusiasm or not. But even if expectations have risen substantially going forward, that alone isn't enough to explain Apple's stock price increase. In addition to the increase in expectations, valuations have also increased substantially. Expectations are high on all fronts, as reflected in the fact that Apple's valuation premium to the S&P 500 has risen to the high end of its recent range (the S&P itself has been steadily increasing in valuation).

What events over the past two months explain the change in price, forecasts, and valuations? There are two reasons. The first was the company's Q1 earnings report, released on May 2. The report beat expectations, sending the stock soaring. Q1 earnings were down, but not by as much as feared. Dividend and share repurchase announcements beat expectations. Solid financial news, but nothing more.

Additionally, on June 10th, a partnership with OpenAI was announced to support a new feature, “Apple Intelligence,” on iPhones and other devices. It's a big deal to have Apple's name associated with the company that developed ChatGPT, the first truly impressive general-purpose large-scale language model. The announced Apple Intelligence features aren't big, unlike what LLM can already do: proofreading and editing tools, emoji customization, image building, improved language interpretation for the Siri digital assistant, all Apple-esque promises on privacy. Nothing that would seem to spur a device upgrade cycle among consumers.

Perhaps all that mattered was for Apple to demonstrate that it is integrating AI tech into its devices so that it's ready when the killer app emerges. After all, Apple's strength is in perfecting new technologies, not pioneering them. Given the strength of its user interface and its vast network of users, it's entirely possible that when consumer applications of AI blossom, Apple will be creating some of the most useful versions of them.

In this respect, Apple is similar to Meta, Microsoft and Alphabet: all three companies are united by the assumption that the economic strength and market position of their traditional businesses will guarantee them a strong position in the fundamentally new and potentially very different AI industry.

We've seen evidence that AI can do some very impressive things in processing information. But from a profit perspective, all we've seen is a surge in chip sales from NVIDIA (and to a lesser extent a few others) and a handful of other companies whose valuations have risen thanks to AI. We don't know what other AI-based businesses will look like outside of the businesses that provide the computing power AI needs. So the fact that Apple could potentially increase its value by hundreds of billions of dollars just by entering the fray is a very good sign that we're in a bubble.

There are two kinds of bubbles. One is a speculative frenzy around an idea or technology that is fundamentally overvalued. Tulips and, in my opinion, cryptocurrencies fit into this category. The other is a bubble that forms around something so valuable, before the financial and competitive structures around it are understood. The railroad, telecom, and dot-com bubbles fall into the latter category. So does AI.

Good read

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