We recently published a list of Top 10 AI Stocks Investors are Talking About in October. Since Apple Inc. (NASDAQ:AAPL) ranks 4th on the list, it deserves a deeper look.
Venu Krishna, Barclays head of U.S. equity strategy, said while talking to CNBC in a latest program that he is not revising his S&P 500 year-end projection of 5,600 because he believes stock valuations are “full.”
“If you see what’s happening, numbers (earnings) have been cut sharply going into the end. What is still anchoring the market is big tech, even though their earnings themselves are kind of decelerating. Then seasonality comes into play. October is the weakest month, and you don’t want to get ahead of that.”
Asked whether he does not believe the market really broadened out, Krishna said while there were some signs of market broadening, the “anchor” of the rally remains big tech, which according to him, are just six stocks.
Moving beyond the earnings and valuations debate, another factor still impacting investor sentiment is the Federal Reserve’s next moves.
Talking about the latest Fed minutes released October 9, Wolfe Research’s Stephanie Roth said on CNBC that a “substantial” majority of Fed officials wanted a 50-basis-point rate cut. However, she said in the next meeting, a 50bps rate cut is “off the table.”
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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
Apple Inc (NASDAQ:AAPL) iPhone 16 delivery times are lagging behind historical trends, but analysts suggest this could be due to stronger supply and high-end buyers holding off for the upcoming Apple Intelligence.
“In Week 3 of our Apple Product Availability Tracker, delivery lead times are showing trends which, if continued, will explain the weaker lead times for the Pro models in the initial weeks as only an aberration led by a combination of better supply mix as well as delay in pick up in momentum from higher-end consumers awaiting the release of Apple Inc (NASDAQ:AAPL) Intelligence,” J.P. Morgan analysts, led by Samik Chatterjee, stated in a note to investors.
Shipping times for iPhone 16 base models in the U.S. improved to 10 days in week three, compared to 17 days the previous week. However, the iPhone 16 Pro and Pro Max models saw no change, remaining at 23 and 29 days, respectively. The trend in China mirrored this, with base models seeing faster delivery times while Pro versions stayed steady.
“In aggregate, although overall lead times for the iPhone 16 models are still lower relative to iPhone 15 last year, narrowing of the gap between the two groups (Base vs. Pro) over the last week as well as steady lead times for the Pro models are highlighting the likelihood that the initial slower momentum in demand for the Pro models is correcting itself with the release of Apple Inc (NASDAQ:AAPL) Intelligence drawing closer,” Chatterjee added.
Morgan Stanley’s data echoed this sentiment. “iPhone 16 lead times as of Sept 27th are still tracking lower than the past 3 iPhone cycles, but lead times for 16 Pro/Pro Max models are now extending/stabilizing across all regions that we track, an unexpectedly positive development,” noted analysts led by Erik Woodring.
Interestingly, lead times for the Pro and Pro Max have grown by two days since last week, a trend more in line with the iPhone 12 and 13 models, rather than the iPhone 14 and 15, which saw shorter wait times at this stage in the cycle. “But interestingly, iPhone 16 Pro/Pro Max lead times have extended by 2 days since last Tuesday, an unexpectedly positive trend that more closely resembles the trajectory of the better-performing iPhone 12 and 13 Pro/Pro Max models,” Woodring added.
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.”
Overall, Apple Inc. (NASDAQ:AAPL) ranks 4th on Insider Monkey’s list titled Top 10 AI Stocks Investors are Talking About in October. 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.
