Apple Eyes the best week since 2021 at Bet AI iPhones are indispensable

(Bloomberg) — Apple Inc. investors finally have a roadmap for how the company will use artificial intelligence — and they responded by pushing the stock to its best week in more than two years.

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Wall Street is betting that the iPhone’s new AI capabilities — including Apple’s deal with OpenAI to integrate ChatGPT — will spur a massive upgrade cycle among users holding onto older devices.

Investors have “more confidence that Apple is back in the game, that it has recovered competitively, and that it will see a reacceleration of growth given the installed base of phones that will need to be updated to take advantage of this new technology,” said Jim Awad, director senior manager at Clearstead Advisors. “Apple will be a big beneficiary of AI and the stock is rallying.”

Wall Street’s top stocks quickly changed positions due to AI optimism. Apple on Thursday surpassed Microsoft Corp. as the largest company by market capitalization. Apple was the third-largest on Monday, behind the $3.2 trillion Nvidia Corp and Microsoft, which has held pole position since January.

The iPhone maker is poised for its biggest one-week percentage gain since 2021, hitting a new record. Since the April low, the stock has added more than $700 billion in market value. Buy ratings on the stock are near their highest since 2017.

While considered unsurprising, Apple’s event eased concerns that have weighed on shares this year. Wall Street was concerned that the company lacked an AI strategy, especially since its growth has been poor compared to other megacaps and its valuation is high. This limited share price gains; Among the Magnificent Seven, only Tesla Inc. – down 27% – performed weaker.

Revenue fell 4.3% in Apple’s fiscal second quarter, the fifth contraction in the past six quarters. Despite this, it trades at about 30 times estimated earnings, above its long-term average and the roughly 27 times multiple of the Nasdaq 100 index.

The iPhone is by far Apple’s biggest business, accounting for more than half of its fiscal 2023 revenue, according to data compiled by Bloomberg. However, iPhone revenue fell 2% last year, a reflection of how millions of people are holding on to their phones longer. AI, bulls argue, represents the kind of indispensable capability that will get them trading.

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“People who weren’t excited about the initial announcement are quickly coming to believe that AI is the innovation that will drive the next iPhone sales cycle,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “We have to be realistic and it will take some time to see the numbers confirm, but AI has the potential to create the kind of growth that will make stocks look cheap.”

The pool of users who might be looking for an upgrade is potentially huge. According to Bloomberg Intelligence, more than 40% of Apple’s more than 800 million smartphones are iPhone 12 or older, with another 27% of users using an iPhone 13. Less than 10% of current users have phones that can be updated for AI software.

“Older things will be obsolete if you want AI,” wrote Ben Reitzes, an analyst at Melius Research. Given the allure of AI, “we now have more conviction in our Super Cycle thesis, which could even result in iPhone revenue growth of around 20% for up to 2 years.”

The prospect of an iPhone refresh cycle has also excited Apple’s suppliers. Skyworks Solutions Inc. rose 17% this week, its biggest one-week percentage gain in four years, while Cirrus Logic Inc. Qorvo Inc. is having its best week since 2020.

The integration of features like improved search, enhanced photo editing and text generation “will drive much broader adoption of AI than we have seen thus far,” wrote Gil Luria, an analyst at DA Davidson, who raised his rating to buy. “Apple is in a unique position to offer these capabilities and may be the only one able to do so soon.”

Technical Chart of the Day

The enormous size of Apple, Microsoft and Nvidia is one of the main reasons why technology has become so dominant in stock indexes. The technology sector of the S&P 500 makes up a whopping 32.6% of the overall benchmark index. This is the highest ratio since 2000, around the dot-com era, and above the recent low of less than 29% recorded in April. The $3 trillion trio of stocks together represent about 21% of the S&P 500.

Top Tech News

• Tesla Inc. investors voted in favor of CEO Elon Musk’s compensation package and changing the company’s state of incorporation to Texas, signaling confidence in his leadership despite falling sales and a precipitous drop in the stock price.

• Shares of Adobe Inc. are set to post their biggest gain in about four years after projecting strong future sales for its creative products, suggesting customers are embracing the company’s new artificial intelligence-based tools.

• The French government has offered to buy some of Atos SE’s operations in its big data and security unit for an enterprise value of 700 million euros ($751 million) as part of discussions to restructure the embattled IT company.

• Crypto billionaires and their allies have amassed a $160 million war chest to protect their fortunes by backing U.S. candidates who favor light regulation of the embattled industry.

• Snowflake Inc. plans to wrap up its own investigation this week into a hacking campaign that netted up to 165 of its customers.

–With assistance from Michael Msika.

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