(Bloomberg) — Apple Inc. investors finally have a roadmap for how the company will use artificial intelligence, sending the company's shares to a record high this week.
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Wall Street is betting that the iPhone's new AI features, including Apple's deal with OpenAI to integrate ChatGPT, will spur a massive upgrade cycle among users hanging on to older devices.
“Given the penetration rate of mobile phones that will need to be upgraded to take advantage of this new technology, investors are becoming more confident that Apple will get back in the race, catch up competitively and growth will accelerate again,” said Jim Awad, senior managing director at Clearstead Advisors. “Apple will be a big beneficiary of AI and its stock price is catching up.”
The iPhone maker's shares fell on Friday but still finished the week up nearly 8% to its highest close since May. The gains added about $239 billion to its market capitalization, putting Apple back at record levels for the first time since December.
AI hopes are quickly changing Wall Street's leading stocks. Apple on Thursday overtook Microsoft to become the world's largest company by market capitalization. Until Monday, Apple had been in third place behind Nvidia, which has a market capitalization of $3.2 trillion, and Microsoft, which had held the top spot since January.
Apple's announcement was seen as little of a surprise, but it eased concerns that have weighed on the stock this year. Wall Street has worried the company lacked an AI strategy, especially since its growth has been slower than other large-cap stocks and its valuation is high. That has limited its stock's rise, with only Tesla, the Magnificent Seven stock that is performing worse than Apple, down 28%.
Apple's second-quarter sales fell 4.3%, its fifth of the past six quarters, but the company's shares still trade at about 30 times forward earnings, above its long-term average and above the Nasdaq 100's roughly 27 times.
The iPhone is by far Apple's largest business, accounting for more than half of its revenue in fiscal 2023, according to data compiled by Bloomberg. But iPhone sales fell 2% last year, reflecting millions of people hanging on to their phones for longer. Bulls argue that AI is the kind of must-have feature that will prompt people to upgrade.
“People who weren't excited by the initial announcement are quickly becoming convinced that AI is the innovation that will fuel the next cycle of iPhone sales,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “We have to be realistic and it will take time for the numbers to bear this out, but AI has the potential to generate growth that makes stocks look cheap.”
The pool of users who might be considering upgrading is potentially huge: Of Apple's more than 800 million smartphone devices, more than 40% are iPhone 12 or earlier models, according to Bloomberg Intelligence, while another 27% of users are using the iPhone 13. Fewer than 10% of current users have a smartphone that can be upgraded to AI software.
“If you want AI, the old stuff becomes obsolete,” Melius Research analyst Ben Reitzes wrote, and given AI's appeal, “we are now more confident in our super cycle theory that iPhone revenues could grow by roughly 20% over up to two years.”
Outlook for the iPhone refresh cycle is also boosting shares of Apple suppliers. Skyworks Solutions Inc. rose 15% this week, its biggest one-week gain in four years, while Cirrus Logic Inc. hit a record high on Thursday. Qorvo Inc. is having its best week since 2020.
The integration of features like improved search, enhanced photo editing and text generation “will spur much broader adoption of AI than we've seen to date,” said DA Davidson analyst Gil Luria, who upgraded the company to a Buy rating. “Apple is uniquely positioned to deliver these capabilities, and may be the only company able to do so in the near future.”
(Stock movements are updated at market close.)
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