The stock market has punished Apple Inc. this year for failing to offer a vision of where its future growth will come from. The shares caught a bid Thursday after the tech giant took a step toward providing an answer.
Apple’s decision to overhaul its Mac computer line to focus on artificial intelligence, as reported by Bloomberg, struck a chord with investors, sending the stock up 4.3% and adding $112 billion in value in its best performance in nearly a year.
“Any announcement that pushes AI into consumer hardware could be very beneficial for Apple,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “However, the impact is yet to be determined.”
That will be key for assessing whether this latest rally can be sustained. Before Thursday’s announcement, the stock was down 15% from its record high set in December, wiping out more than $460 billion in market value. Trading close to its cheapest level in about a year, bargain-hunters clearly could justify taking a chance on Apple’s latest stab at AI relevance.
Sustaining this momentum, however, will depend on Apple’s ability to deliver on the promise of growth. For the Cupertino, California-based tech giant, that likely means getting AI into the iPhone.
The stock gained 0.5% on Friday.
Trading at Discount
“We think Apple will come back,” said Daniel Skelly, head of Morgan Stanley’s wealth management market research and strategy team. “It is hard to bet against some of the perennial winners forever.”
Apple has paid mightily for its recent stagnation. It’s one of the weakest performers among the so-called Magnificent Seven this year, trailing only Tesla Inc. That has made it relatively cheap.
The stock trades at 26 times earnings, a discount to megacap peers such as Microsoft Corp. It’s less expensive than the Nasdaq 100 benchmark, which has an average multiple of 27, according to data compiled by Bloomberg.
The underperformance reflects the lack of a defined AI strategy and several quarters of weak trends, despite the company’s strong financial position and proven revenue generation.
“It has all these defensive qualities, like its cash flow, balance sheet and buybacks,” said Skelly. “It will start outlining more clarity and visibility around its AI pipeline, and while it may not be this year, expectations are building for an AI-enabled iPhone. In other words, it is becoming increasingly attractive.”
Hedge Fund Enthusiasm
JPMorgan Chase & Co. sees rising enthusiasm for Apple among hedge fund investors, as its reduced valuation and AI tailwinds offset challenges in China and the company’s services business.
Hedge funds are eyeing the headwinds for an entry point while “increasingly warming up to the opportunity of the AI upgrade cycle,” according to JPMorgan analyst Samik Chatterjee, who has an outperform rating on the stock, in a recent note.
The broader hope for Apple investors is that AI will be the catalyst that spurs a re-acceleration of growth. Margins are tight as revenue has declined in four of the past five quarters, and analysts expect sales to contract by 4.6% in its second-quarter results, which will be released in coming weeks. While this represents some of Apple’s weakest growth in decades, the upside is revenue is expected to gradually rebound later this year.
“Investors have historically underestimated Apple’s gross margins and it appears that it is happening again,” Bank of America Corp. analyst Wamsi Mohan wrote in a note to clients. “We see gross margins at Apple headed significantly higher, driven by increased mix of services within the overall portfolio,” he added.
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