Third Point believes AI demand can largely boost Apple’s revenue and earnings in the coming years.
Apple (AAPL) unveiled a preview of its artificial intelligence feature “Apple Intelligence” in July. This feature could help improve Siri, automatically generate emails and images, and sort notifications. However, the rollout includes only a partial set of features, not the full suite.
The AI system will debut in October after the release of iOS 18, according to Bloomberg. Apple also says it will roll out more AI functions, including image and emoji generation, automated photo cleanup, and integrated ChatGPT over the next year.
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“Despite the stock’s recent strong appreciation, we see room for significant upside ahead as the magnitude of this new AI opportunity surprises,” said Third Point CEO Daniel Loeb in an August 23 investor letter.
Apple CEO Tim Cook said the company will “continue to make significant investments” in its Apple Intelligence technology during the August earnings call. “We are very excited about Apple Intelligence, and we remain incredibly optimistic about the extraordinary possibilities of AI.”
Apple expects strong revenue growth for the September quarter
Apple reported a solid fiscal third-quarter earnings on August 1. The company earned $1.40 per share ahead of the consensus estimate of $1.35. Apple's revenue of $85.78 billion, up 4.9% from a year ago, beat the $84.53 billion estimate. It was also a record third-quarter performance.
Apple's biggest business remains the iPhone. IPhone revenue was $39.30 billion, off 1% from a year ago but beating the $38.81 billion analyst estimate. It makes up about 46% of the company's sales. A new iPhone model is due this fall.
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The iPad segment demonstrated the strongest growth, with sales increasing nearly 24% year-over-year to $7.16 billion. Around half of iPad buyers were first-time purchasers, indicating that the tablet market is not yet saturated, according to Apple’s CFO Luca Maestri.
Apple sales in Greater China, including Taiwan and Hong Kong, fell 6% to $14.72 billion as local rivals pressured sales.
Apple expects the revenue for the fiscal fourth quarter to grow year-over-year at a rate similar to the June quarter, Maestri said in the earnings call.
The revenue growth for the fiscal third quarter was approximately 5%.
Third Point says Apple shares are “under-owned” by institutions
Third Point began to buy Apple shares in April, and the tech giant was one of its portfolio's top five winners for the second quarter. Apple shares gained about 23% during the period.
“Despite Apple’s dominance as a business, its stock had become increasingly 'under-owned' by institutional investors, and its relative multiple had compressed toward a multi-year low," Loeb said, citing "several years of stagnant earnings growth" and concerns that Apple might become an "AI loser."
“Our research led us to a different conclusion: we believe AI-related demand could drive a step change improvement in Apple’s revenue and earnings over the next few years,” he added.
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The hedge fund’s flagship Offshore Fund saw a return of 1.8% in the quarter ended June 30, falling short of the S&P 500 Index’s 4.3% gain during the same period.
The company said the growth was “largely driven by technology companies,” but the diversification in other sectors like industrials, consumer and healthcare partly offsets the gains. Its top losers were Bath & Body Works (BBWI) , Advance Auto Parts (AAP) , Ferguson PLC, Airbus SE, and payments company Corpay, formerly Fleetcor.
Analysts have revised their price targets on Apple stock after earnings and outlook.
Citi raised its Apple target to $255 from $210 and kept a buy rating after seeing Apple’s "beat and raise" financial results. The analyst was encouraged by positive early feedback on the new iOS 18 Apple Intelligence features and management's belief that AI will drive substantial iPhone upgrades.
Goldman Sachs also raised Apple's price target to $275 from $265 and maintained a buy rating. The analyst believes Apple is nearing a multi-year iPhone replacement cycle.
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“The company reported a solid iPhone-driven earnings beat in fiscal Q3 with continued Services momentum,” the analyst tells investors in a research note.
Barclays analyst Tim Long lowered his target on Apple to $186 from $187 with an underweight rating.
"The fiscal Q3 print was better than expected, led by iPad, and the Q4 quarter revenue guidance was a slight beat versus the Street, although modestly less than Barclays' estimate," Long wrote. He was concerned, however, about sales in China, regulatory risks, and uncertainty around iPhone 16 sales and AI features.
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