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Cupertino-based behemoth Apple (AAPL) has gone far beyond the realm of being a mere tech company. Co-founded by the legendary Steve Jobs and now helmed by Tim Cook, Apple has become a consumer brand synonymous with aspirational devices, and has been a part of our cultural zeitgeist for years.
With products like its flagship iPhone, Macbooks, Apple Watch and iMacs in its repertoire, all connected by the ecosystem of its highly profitable services business, the company is seemingly a giant in whichever area it operates in. However, that is not the case in artificial intelligence (AI) just yet, with rival “Magnificent Seven” companies like Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN) and Google (GOOGL) seemingly way ahead of the iPhone maker on this front.
So, is Apple's underperformance so far in the AI space as dire as some skeptics think? Or is the company silently burnishing its AI credentials for an eventual blitzkrieg that will blow the competition away? Let's have a closer look.
Apple's Quiet AI Power
Apple has not been very vocal about its AI moves. Yet the tech giant remains one of the foremost investors in the technology. Between 2016 and 2020, Apple was the biggest acquirer of AI startups, scooping up 25 companies in the process. Further, with a formidable cash pile, Apple has the financial muscle for more acquisitions to bolster its AI portfolio.
The company also has its own AI Large Language Model (LLM) named Ajax, which has been trained on more than 200 billion parameters. It is also working on a new version of Xcode and other development tools that build in AI for code completion, which would improve the quality of third-party apps on the iPhone.
Notably, Deepwater Asset Management analyst Gene Munster is also quite bullish about Apple's AI prospects. As Apple builds its foundational AI model focused on personalized AI, Munster expects it to capture about 20% of the market. He noted that the company can charge about $10 per month for the service.
Moreover, in the recent “Let Loose” event, Apple introduced the next-generation iPad Pro and iPad Air powered by an all-new M4 chip. The company claims that this chip is its most powerful and is capable of 38 trillion operations per second. With a 32% market share in the tablet market, these new AI-enhanced tablets from Apple are expected to further solidify its position in this space.
In the short term, market participants are expecting AI-specific announcements from Apple at its WWDC 2024 conference on June 10, with reports suggesting that the company will roll out an AI-powered version of the iOS.
Later in the year, the new iPhone 16 models are forecast to be laden with AI features and enhancements that will have a much longer battery life, with support for spatial video.
Robust Fundamentals
Despite a set of not-so-exciting numbers for its fiscal Q2 of 2024, Apple's results on both the revenue and earnings front surpassed analyst estimates. For the quarter ended March 30, Apple reported revenues of $90.8 billion. Although its top line declined 4.3% year over year, revenue from its services business reached a record high of $23.9 billion compared to $21 billion in the prior year.
At the same time, earnings rose marginally from the previous year to $1.53 per share, outpacing the consensus estimate of $1.50. Notably, Apple's EPS has consistently topped expectations in each of the past five quarters.
Over the past 10 years, Apple has recorded revenue and EPS growth at a CAGR of 8.04% and 10.29%, respectively.
Further, Apple's legendary cash flow generation capabilities in the quarter remained solid, as the company reported $62.6 billion in cash from operating activities. Additionally, the company exited the quarter with a cash balance of $32.7 billion, much higher than its short-term debt levels of $10.8 billion.
Apple stock, which is up less than 1% on a YTD basis, offers a dividend yield of 0.52%. The company's modest payout ratio of about 15% provides it with ample room to increase its dividends in the following years, and continue to invest in growth initiatives - including AI.
Analysts Are Upbeat on AAPL
Overall, analysts are optimistic about Apple stock, which has an average rating of “Moderate Buy” with a mean target price of $205.96. This denotes an upside potential of about 6% from current levels.
Out of 30 analysts covering the stock, 17 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, 9 have a “Hold” rating, and 1 has a “Strong Sell” rating.
Deepwater's Munster is particularly bullish on AAPL's prospects, telling CNBC, “Investors are largely in denial about what Apple's AI opportunity is going to be." Even more notably, the analyst added that he expects AAPL to outperform NVDA over the next year.
On the date of publication, Pathikrit Bose 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.
