We recently published a list of Analysts are Recommending These 10 AI Stocks. Since Apple Inc. (NASDAQ:AAPL) ranks 4th on the list, it deserves a deeper look.
The past several months of market activity and tech innovation has proved that the AI trends that started with the launch of ChatGPT are here to stay and all of this was not something that’d fizzle out after making headlines for some time. Companies are investing billions in AI and they expect to see the results of their investments in the coming months and years. Analysts at UBS said in a report earlier this year that if the launch of ChatGPT was the “iPhone moment” for the AI industry, apps like Copilot signify the “App Store moment.”
UBS also increased its revenue estimates for the AI industry in the report by 40%. The firm said at the time that it now expects revenue in the AI industry to increase from $28 billion in 2022 to $420 billion in 2027. This would represent a CAGR of over 70%.
UBS justified its growth projections by drawing an analogy from the past growth cycles of mainframes, smartphones and PCs.
“Annual shipments for mainframes were only about 1mn units until the 1980s, when they ballooned to around 10mn as microcomputers became mainstream computing devices. This was followed by a sharp increase during the PC era, when annual PC shipments shot up to more than 100mn units, with PC shipments eventually reaching an annual run-rate of nearly 300mn. Smart devices, which include smartphones and tablet PCs, crossed 1bn shipments during the mid2010s. Currently, annual shipments are close to 1.5bn units. With AI, we expect this 10x growth trend to continue, with annual AI chatbots and applications potentially crossing 10bn units.”
For this article we took a look at the latest analyst rating actions around AI stocks and picked the 10 most important AI companies that recently received positive comments or ratings from notable Wall Street analysts. 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).
An Apple store displaying the latest in consumer electronics, from smartphones to wearables.
Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Ben Reitzes, Melius Research’s head of technology research, said while talking to CNBC that Apple Inc (NASDAQ:AAPL) is in a “generational” upgrade cycle.
“First, the installed base of phones is old. So, we have that going for us. Then, Apple Intelligence only works on the newer phones.”
The analyst said that he’s very “upbeat” on Apple shares. Asked about Buffett selling Apple Inc (NASDAQ:AAPL) shares, he said he might have “other motivations.”
Ben Reitzes said that he believes Apple’s upgrade cycle would peak in 2026 and Wall Street expectations for Apple are easily beatable.
Apple Inc (NASDAQ:AAPL) has a new bull: billionaire Dan Loeb. The founder of the New York-based hedge fund Third Point said in a latest letter to investors that Apple has a significant upside potential due to AI.
“We believe Apple Inc (NASDAQ:AAPL) recently announced ‘Apple Intelligence’ suite of AI-enabled smartphone features – the most compelling of which is a next-generation virtual assistant – will start driving meaningful new demand within Apple’s installed base, resulting in accelerating revenue growth on two fronts. First, iPhone revenue is going to see a marked improvement because Apple Intelligence features will not be backwards-compatible with existing iPhone models, creating the conditions for a forced upgrade cycle. Second, Apple’s App Store is likely to become the primary distribution platform for most new consumer focused AI apps such as OpenAI’s ChatGPT (with which Apple Inc (NASDAQ:AAPL) recently announced a partnership). We expect Apple’s claim on the future economics of these apps to be substantial as it exploits its distribution advantage.”
Loeb reiterated the bull case that many other Wall Street analysts have made. This case assumes that millions of people will upgrade their iPhones because they’d want to use AI-powered new models of Apple Inc (NASDAQ:AAPL) flagship device.
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.
Third Point Management stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
In April, we took a position in Apple, the world’s leading consumer technology franchise, with an ecosystem of 2.2 billion devices spanning a broad array of form factors including smartphones, tablets, laptops, watches, earphones, and smart home devices. Apple excels in most of these device categories, with revenue share of 50-60% in several key markets.
Despite Apple’s dominance as a business, its stock had become increasingly “under-owned” by institutional investors and its relative multiple had compressed toward a multi-year low. We believe that this was due to several years of stagnant earnings growth, exacerbated by more recent fears that Apple may turn out to be an AI loser. Our research led us to a different conclusion: we believe AI-related demand could drive a step change improvement in Apple’s revenue and earnings over the next few years…” (Click here to read the full text)
Overall, Apple Inc. (NASDAQ:AAPL) ranks 4th on Insider Monkey’s list titled Analysts are Recommending These 10 AI Stocks. 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.