We recently published a list of Top 10 Buzzing AI Stocks Now. Since Apple Inc (NASDAQ:AAPL) ranks 3rd on the list, it deserves a deeper look.
Following the aggressive rate cut by the Federal Reserve, the market roared to new highs but quickly lost enthusiasm as investors look for clues on what might be ailing the economy that pushed the Fed to go more dovish than expected. However, others think the bull market is going to continue.
BMO Capital’s Brian Belsk has raised the S&P 500 target for 2024 to 6,100 from 5,600. Talking to CNBC in a latest program, Belsk said the “resiliency” of this bull market is “undoubted.”
The analyst said that the stock market is going higher through the end of this year.
“We do believe that the Fed is doing a great job. We believe the Fed that we are not hitting into a recession. We believe the Fed that we are heading into more of a soft landing,” the analyst said.
Belsk thinks we are in the “1995-1996 environment” where we can “handle” the 24x earnings multiple.
The analyst added that the Mag. 7 stocks underperformed the market in the third quarter and yet the broader market grew, which shows the market rally is broad.
For this article we chose 10 AI stocks trending on the back of latest news, earnings and analyst ratings. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A wide view of an Apple store, showing the range of products the company offers.
Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Joanna Stern, Wall Street Journal personal technology columnist, while talking to CNBC in a latest program, said that while there is “some good” in Apple Inc (NASDAQ:AAPL) Intelligence, the software is still in beta and it’s still early to say anything concrete about it. She said that Apple Intelligence’s writing and summary tools were strong but its image editing tool was “not the best.”
Stern said that practically speaking, the new iPhone is an S model because its hardware does not show a significant bump. She also thinks AI would not be a huge motivator for people to upgrade to the new iPhone.
“I do not think that many people are running out to buy these phones for AI.”
Almost every bullish case on Apple Inc (NASDAQ:AAPL) is 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.
Baron Technology Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“The Fund’s chief relative detractor was Apple Inc. (NASDAQ:AAPL), even though it was a meaningful contributor to absolute performance, as we added to our Apple position significantly during the period. We bought Apple well, but in 20/20 hindsight we didn’t buy enough. Because Apple has an oversized weight in the Benchmark (its average weight was 15.7% for the period), when Apple’s stock outperforms (it appreciated 23.0%), it has generally been a headwind to relative performance. Our Apple underweight accounted for 33% of our relative underperformance for the period.
This quarter we increased the size of our position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shifts, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on-device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
Overall, Apple Inc (NASDAQ:AAPL) ranks 3rd on Insider Monkey’s list titled Top 10 Buzzing AI Stocks Now. While we acknowledge the potential of Apple Inc (NASDAQ:AAPL), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AAPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
