2. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Morgan Stanley said in a new report that Apple’s iPhone 15 production was stronger than expected in July, with growing momentum leading up to the iPhone 16 launch. Analysts, led by Erik Woodring, reported that their checks from the Greater China Tech Hardware team showed iPhone builds in July surpassed initial expectations, prompting an upward revision of September quarter iPhone builds to 54 million units, an 8% increase year-over-year and 2 million units higher than previously forecasted.
While the real test will be early October’s iPhone sales, the analysts noted that momentum appears to be building as the iPhone 16 launch approaches. The increase for the September quarter reflects the continued strength of the iPhone 15 late in its cycle, with no changes to the production of other iPhone models. However, it’s unclear if this trend is driven by anticipation for Apple Intelligence or other factors.
Baird analyst William Power said in a note that he estimates a whopping 95% of iPhones in the world will need an upgrade at “some point” to take advantage of Apple Intelligence. The analyst mentioned lower upgrade rates at AT&T and Verizon, suggesting consumers might be waiting for AI-integrated smartphones. Based on this catalyst, the analyst upped his fiscal 2025 iPhone estimates by about 20 million units, now projecting iPhone revenue to reach $216.1 billion, a 9% year-over-year increase, surpassing the consensus estimate of 6% growth. Apple Inc (NASDAQ:AAPL) is expected to generate $418.1 billion in full-year revenue and $7.30 per share in earnings, up from previous forecasts of $394.6 billion and $6.73 per share.
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.
Wedgewood Partners stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) also contributed to performance after unveiling its AI strategy to its software developers. The Company has been at the forefront of proprietary computer processor development for over a decade. Given the compute-intensive nature of AI applications, Apple is well-situated to develop a suite of compelling, consumer-friendly AI services that are also cost-effective. While revenue growth has been relatively flat post-Covid-19, we expect Apple’s AI value proposition will be compelling enough for consumers to continue growing their engagement in the Apple ecosystem over the next several years.”
