4. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
More and more Wall Street analysts are starting to realize that the much-hyped demand for iPhone 16 might never be realized and Apple Inc (NASDAQ:AAPL) is in a different world now.
Lead times for the iPhone 16 are shorter than in recent years, according to investment firms. Morgan Stanley’s Erik Woodring points out that while supply has improved and there are some signs of strong demand, it’s wise to remain cautious. As of September 24, average lead times in the U.S. for the iPhone 16 stand at 15.2 days, down from 25.7 days for the iPhone 15 last year and 18 days for the iPhone 14 in 2022.
Globally, the trend is similar, with average lead times for the iPhone 16 at 16.3 days, compared to 28.5 days for the iPhone 15. UBS analysts echo these findings, noting that typically, wait times for high-end models like the Pro and Pro Max increase as demand stabilizes. However, this year, wait times for the iPhone 16 haven’t shown the same uptick as in previous launches.
UBS suspects demand might stay below expectations until the rollout of iOS 18.2 in November, which will introduce more AI features. The update, iOS 18.1, is set for mid-October and will showcase some of these features. While it’s early to draw firm conclusions from lead times, Woodring suggests the outlook for iPhone builds leans more negative than positive, despite reports of strong initial demand from some regions like India.
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
Parnassus Growth Equity Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) gained but detracted from relative performance due to our underweight. While the company’s overall and iPhone revenues declined year over year, the unveiling of an upgraded iPad Pro and iPad Air boosted investor sentiment. In particular, the introduction of generative AI features allayed concerns that Apple was not keeping pace with competitors.”
