Apple’s AI Rally Puts Valuation at Risk of Outpacing Reality

(Bloomberg) — Apple Inc.’s record rally has sparked skepticism about whether its artificial intelligence strategy justifies the stock’s valuation.

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The stock hit a new all-time high last week, briefly putting Apple back into Microsoft Corp. as the world’s most valuable company after unveiling new AI capabilities that investors hope will spur a massive upgrade cycle among users.

That pushed the valuation to about 30 times forward earnings, a level the stock has struggled to sustain in the past. While Apple’s plans have been applauded by investors seeking faster revenue growth and higher returns on the company’s capital, questions remain about when exactly that boost will arrive.

“I hope the market is right, but so far we haven’t seen enough to know for sure,” said David Daglio, who manages $7.9 billion as chief investment officer at TwinFocus Capital Partners LLC. “I wouldn’t put new money to work here. The risk-reward is negative at best.”

The timing of Apple’s AI strategy delivering a significant increase in revenue is critical. The rollout of new AI offerings may be slower than investors want, stretching into 2025. Shares were up as much as 1.1% on Friday morning.

Wall Street expects Apple’s revenue growth to pick up again in the second half of 2024, but end the year at just 1% before accelerating to 7% in 2025. In the iPhone segment, revenue is expected to decline in the last two quarters of 2024, when compared to the same period of the previous year.

Rising valuations are top of mind for investors considering how to play the next leg of the AI ​​rally. In addition to Apple, gains that reached all-time highs in shares of Microsoft and Nvidia Corp. they pushed the broader market higher, but they also increased the stock’s price-to-earnings ratio. Microsoft trades at about 34 times forward earnings, while Nvidia trades at 43 times. The Nasdaq 100 index trades at about 27 times forward earnings.

Some see room for Apple shares to rise, even near all-time highs. JPMorgan analysts led by Samik Chatterjee this week raised their price target to $245 from $225, saying the new AI features should kickstart an iPhone refresh cycle and boost profits.

Still, Nancy Tengler, CEO of Laffer Tengler Investments Inc., says she removed Apple from her list of best ideas because of its valuation.

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“There is more growth visibility in other names, like Microsoft, Amazon, Oracle, Broadcom,” she said. “There are other opportunities we are taking advantage of and places where valuations are not as stretched.”

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Profits due Friday

–With assistance from Subrat Patnaik and Jeran Wittenstein.

(Updates stock movements at market opening)

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