3. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Apple (NASDAQ: AAPL) may have reduced its iPhone 16 production for the December quarter by 3 million units, according to a supply chain check by Barclays. Analysts Tim Long and George Wang noted, “We believe AAPL may have cut roughly 3M units at a key semiconductor component for the Dec-Q, which, if confirmed, would be the earliest build cut in recent history.”
Apple Inc (NASDAQ:AAPL) is set to roll out its Apple Intelligence features in the U.S. starting mid-October with the iOS 18.1 update. However, the Chinese-language rollout will not begin until 2025, with Europe seeing a similarly staggered introduction.
Barclays believes iPhone shipments for the September quarter could reach 51 million units, assuming favorable channel fill. But the December quarter appears increasingly at risk due to recent order cuts, disappointing sell-throughs, a staggered Apple Inc (NASDAQ:AAPL) Intelligence rollout, limited AI adoption outside the U.S., and minimal hardware differentiation. The firm maintains its Underweight rating on Apple.
Almost every bullish case on Apple Inc (NASDAQ:AAPL) was built around this assumption: millions of people would rush to upgrade their iPhone because of AI features.
However, Apple Inc (NASDAQ:AAPL) has been seeing a long-term decline in mobile carrier upgrade rates, especially postpaid, for several years. This suggests that people are holding onto their devices longer, likely due to economic factors, satisfaction with current technology, or a lack of exciting new features in recent models. This trend isn’t great for Apple Inc (NASDAQ:AAPL). Can Apple Intelligence break this trend? We’ll find out soon.
However, the assumption that we will see a huge upgrade cycle of iPhone just because of AI is big and comes with a lot of risks. Apple Inc (NASDAQ:AAPL) trades at a forward PE multiple of around 35x, well above its 5-year average of nearly 27x. Its expected EPS forward long-term growth rate of 10.39% does not justify its valuation, especially with the iPhone upgrade cycle assumption. Adjusting for this growth results in a forward PEG ratio of 3.33, significantly higher than its 5-year average of 2.38.
Columbia Contrarian Core Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) – Despite the stock falling after announcing earnings in late May, Apple regained ground toward the end of the quarter, fueled by the company’s long-awaited AI announcement at its annual Worldwide Developers Conference (WDC). At the conference, the company showcased some of its new AI features powered by Apple Intelligence that would be coming to Apple products and also announced a partnership with ChatGPT. Investors greatly welcomed the announcement of Apple’s AI strategy and the stock surged, passing Microsoft as the world’s most valuable company (although this hallmark wouldn’t last). Beta testing of these new features will be coming later this summer, but the initial promise and excitement looks to be a potential catalyst for an upgrade cycle, as the company looks to persuade users who have had the same smartphone for years to consider an upgrade.”
