(Bloomberg) — Apple Inc.’s record-breaking stock price is raising skepticism about whether the company’s artificial intelligence strategy justifies its stock valuation.
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Apple's shares soared to a new all-time high last week, briefly surpassing Microsoft to become the world's most valuable company, after the company unveiled new AI features that investors hope will spark a massive upgrade cycle among users.
That has pushed the stock price to about 30 times projected earnings, a level the company's shares have struggled to sustain in the past.Apple's plans were welcomed by investors who want faster revenue growth and higher returns on capital from the company, but questions remain about when exactly that upside will materialize.
“We're hopeful that the market conditions are right, but we just don't have enough data right now to be confident,” said David D'Agulio, who manages $7.9 billion as chief investment officer at Twin Focus Capital Partners. “We're not going to put new money here. The risk/reward is negative at best.”
The timing of Apple's AI strategy to deliver big revenue gains is key, as the rollout of new AI products could be slower than investors hope and stretch into 2025. The company's shares were up 1.1% on Friday morning.
Wall Street expects Apple's revenue growth to pick up again in the second half of 2024, but only at 1% by the end of the year, before accelerating to 7% in 2025. For its iPhone division, revenue is projected to decline year-over-year in the final two quarters of 2024.
Rising valuations are top of mind for investors considering how to handle the next phase of the AI stock rally. Outside of Apple, Microsoft and Nvidia stocks have risen to all-time highs, lifting the broader market, but so have their price-to-earnings multiples. Microsoft trades at about 34 times expected earnings and Nvidia at 43 times. The Nasdaq 100 index trades at about 27 times expected earnings.
Some see room for Apple shares to rise closer to all-time highs: JPMorgan analysts led by Samik Chatterjee raised their price target to $245 from $225 this week, saying new AI features should kick off an iPhone upgrade cycle that will boost revenue.
Still, Nancy Tengler, CEO of Laffer Tengler Investments, said Apple's valuation was the reason she removed the company from her list of best ideas.
“There are other names out there that offer more growth, like Microsoft, Amazon, Oracle, Broadcom,” she said. “There are other opportunities that we're taking advantage of, and they're not at as high valuations.”
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Earnings are announced on Friday
–With assistance from Subrat Patnaik and Jeran Wittenstein.
(Stock price movements will be updated when the market opens)
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