Apple (AAPL) stock has gained just over 12% in the past year, underperforming the S&P 500 Index's ($SPX) 19.5% return. Beyond that, Apple's stock has performed modestly compared to its major technology peers.
Over the same period, Nvidia (NVDA), Meta (META), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT) have all seen substantial increases in their stock values, with gains of approximately 148%, 56%, 42%, 29%, and 26%, respectively.
Why Has Apple Stock Lagged Its Peers?
This comparative underperformance highlights that Apple trailed behind its tech counterparts in the rapidly advancing field of artificial intelligence (AI). Apple has been relatively slower in embracing and investing in AI technology, which has emerged as a key driver of growth for many of its competitors.
Nvidia, for example, has led the charge in AI advancements with its graphics processing units (GPUs) that power a wide range of AI applications. Meta has focused heavily on AI-driven content creation and enhanced user experiences on its platforms. Alphabet and Microsoft have integrated AI across their products and business segments. Meanwhile, Amazon is leveraging AI to optimize its cloud computing services.
Apple Integrates AI Tech into Its Ecosystem
While Apple has lagged behind its tech counterparts on this front, the company last month unveiled its AI technology, Apple Intelligence. Moreover, it announced a strategic partnership with ChatGPT. This move signifies a major leap in Apple’s commitment to integrating advanced AI capabilities into its ecosystem.
More critically, this will likely bring the next wave of growth for Apple as it will likely drive sales of its latest devices.
Ahead of the tech giant's upcoming earnings report, let’s dig deeper.
AI to Drive Significant Gains for AAPL
It’s worth noting that Apple has been struggling against soft demand for its products amid heightened competition, tough year-over-year comparisons, and macro uncertainty.
In Q2 of fiscal 2024, Apple reported $66.9 billion in Products revenue, a 10% decline year-over-year. This decrease was primarily due to tough comparisons with the previous year’s iPhone sales and intensified competition in the Chinese market. The Products segment's gross margin also fell to 36.6%, down 280 basis points sequentially, reflecting seasonal impacts and a shift in product mix.
Breaking down the revenue, iPhone sales totaled $46 billion, marking a 10% drop from the previous year. iPad revenue fell 17% year-over-year to $5.6 billion.
In contrast, Mac revenue increased by 4% year-over-year to $7.5 billion. This was driven by strong demand for the new MacBook Air powered by the M3 chip. The latest MacBook models have been well-received for their impressive AI capabilities, contributing to an all-time high in the Mac installed base. This increase in Mac sales suggests that new AI improvements will likely lead to more people buying Apple products.
Apple’s focus on AI technology and innovative product features positions the company for significant growth. The introduction of Apple Intelligence and new AI-driven functionalities are set to drive device upgrades and attract new users. Moreover, its strategic partnership with ChatGPT provides monetization opportunities and a solid foundation for future revenue growth. As Apple continues evolving its AI strategy and expanding its product ecosystem, its growth will likely accelerate and boost its market position.
The higher product demand will drive Apple’s installed base of active devices and, in turn, its Services revenue. Apple’s Services revenue reached an all-time record of $23.9 billion, growing 14% year-over-year, with its installed base of active devices continuing to grow at a healthy pace. This provides a strong foundation for the future growth of the Services business, as increased customer engagement within its ecosystem due to the integration of AI is expected. Both transacting accounts and paid accounts are likely to grow.
Moreover, on the enterprise front, customers could continue to invest in Apple products to drive productivity and innovation, further boosting Apple's market position.
The Bottom Line on AAPL
Apple’s strategic moves in AI and its continued innovation in product features will unlock new growth avenues. Despite its recent underperformance in stock price compared to its peers, Apple’s renewed focus on AI and strategic partnerships position it for substantial long-term growth.
Moreover, Apple is poised to reward its investors with increased dividends and more aggressive share repurchase programs. The tech giant has already distributed over $27 billion to its shareholders in Q2, with $3.7 billion in dividends and $23.5 billion in buybacks. Further, with optimism over future growth, Apple authorized an additional $110 billion for share repurchases.
While some analysts remain cautious about Apple stock due to short-term challenges, the integration of AI technology could lead to a positive shift in sentiment as product sales rise.
Out of 30 analysts, 20 have a “Strong Buy” rating, three suggest a “Moderate Buy,” six recommend a “Hold,” and one has a “Sell” rating. This results in a consensus rating of “Moderate Buy.”
The average price target for Apple stock is $227.12, indicating a modest potential upside of about 4.2% from recent levels. However, Apple’s initiatives in AI technology and expected rebound in product sales will likely act as a significant growth catalyst, leading analysts to adjust their price targets higher.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
