Should You Sell the News After Apple's Big AI Reveal?

For most of the 20th century, artificial intelligence (AI) was a sci-fi dream, like flying cars. Now, in the 21st century, AI is everywhere – from social media suggestions to diagnosing rare diseases.

Beyond the usual tech titans, emerging players are making significant strides. Nvidia NVDA dominates with its essential AI GPUs, while Microsoft MSFT powers ahead through partnerships like OpenAI. Apple Inc. AAPL, fashionably late to the AI party, just stole the spotlight by unveiling “Apple Intelligence” at WWDC on June 10, signaling a game-changing entry that sent the stock to new highs.

So, with Apple's grand entrance into AI, should investors cash in or stick around? Steve Eisman of "Big Short" fame, now a managing director at private investment firm Neuberger Berman, once dubbed Apple as a "hidden AI play," and now sees the company as a pivotal player in AI, advising investors, "Definitely hold on to your Apple position."

Let’s dive into why Eisman and more analysts are so optimistic.

About Apple Stock

Apple Inc. AAPL, a California-based titan founded in 1976, crafts groundbreaking tech devices like the iPhone, Mac, and iPad. Known for innovative wearables like AirPods and Apple Watch, Apple also excels in services – Apple Music, Apple TV+, and Apple Pay. With a market cap surpassing $3.2 trillion, Apple has revolutionized digital experiences, blending sleek design with seamless functionality.

Since showcasing its "Apple Intelligence" product lineup at WWDC two weeks ago, Apple's shares have rallied roughly 6.3%. The buzz around Apple’s innovative AI-enabled upgrades propelled its stock to an all-time high of $220.20 on June 12.

Over the past 52 weeks, AAPL stock has gained 12.5%. Over the past three months alone, it gained 21.9%, outperforming the broader S&P 500 Index's SPX 4.4% returns and Magnificent Seven ETF’s MAGS 10.6% gains over the same time frame. 

Apple also has a respectable dividend streak, paying consistently higher dividends for 12 consecutive years. 

On May 16, it rewarded shareholders with a quarterly dividend of $0.25 per share, marking a 4% increase. This brings its annualized dividend to $1 per share, translating to a dividend yield of 0.48%. With a conservative payout ratio of just 14.8%, there is plenty of room for Apple to increase dividends further.

Dividends aren't the only way Apple returns value to shareholders. Along with its latest dividend hike, the tech giant also committed a whopping $110 billion to share buybacks, which delighted investors.

From a valuation standpoint, the stock is trading at 32.58 times forward earnings and 8.39 times sales – higher than the tech industry median, but in line with other Big Tech giants like Alphabet GOOGL and Microsoft. 

Apple Beats Q2 Earnings Estimates

After the close on May 2, Apple reported its fiscal Q2 earnings results, which exceeded Wall Street’s projections. Total sales hit $90.7 billion, with $66.9 billion from products, and services revenue surging 14.1% year over year to $23.9 billion. Net income arrived at $1.53 per share, surpassing consensus estimates of $1.50. 

In fiscal Q3, management anticipates low single-digit year-over-year revenue growth, marking a reversal from recent declines. The services business is projected to lead with double-digit growth.

Analysts tracking Apple expect the company’s profit to reach $6.58 per share in fiscal 2024, up 7.3% year over year, and grow another 11.3% to $7.32 in fiscal 2025.

Apple's AI Revolution Begins

On June 10, Apple made a seismic splash into the AI world at its annual WWDC event. Unveiling "Apple Intelligence," a personal intelligence system that combines generative AI models with user context, the tech giant introduced groundbreaking AI features across its flagship products. This move marks a leap forward, with new OS versions boasting customizable tools driven by generative AI for iPhones, Macs, and iPads.

Key enhancements include Siri's integration with generative chat technology, which enables complex interactions and seamless app operations - thanks to a high-profile new partnership with OpenAI for advanced AI capabilities. 

The AI-driven strategy aims to redefine the user experience, and, ideally, drive a significant iPhone upgrade cycle for Apple - something it hasn’t benefited from for a while, as evidenced by its sluggish top-line growth. 

What Do Analysts Expect for Apple Stock?

Eisman isn’t the only one who views Apple as pivotal in today's AI narrative. Dan Ives of Wedbush Securities wrote over the weekend, “Cupertino will be the gatekeepers of the consumer AI Revolution… AI adds $30-$40 per share to Apple story.” Ives has a $275 price target on AAPL. 

Melius Research today also upped its price target on AAPL, with analyst Ben Reitzes suggesting that AI-related iPhone upgrades offer earnings visibility well into 2026. The firm now sees AAPL rising to $260.

And previously, on June 21, analysts at both CFRA and Bernstein hiked their respective Apple price targets to $240 per share. CFRA analyst Angelo Zino sees Apple transforming the iPhone into "the ultimate personal assistant." He believes Wall Street underestimates iPhone 16 sales, predicting 3% to 5% unit growth, with potential price hikes. Zino also expects Apple Intelligence to drive consumer upgrades, spurred by loyal fans and an aging user base, supporting long-term growth.

Bernstein analyst Toni Sacconaghi claims that Apple's WWDC keynote positioned the company as an AI leader, capable of bringing AI to over a billion iPhone users. In particular, Sacconaghi called out the potential for Apple to benefit from high-margin app and advertising revenue on new AI-enabled iPhones.

AAPL has a consensus “Moderate Buy” rating overall. Of the 30 analysts covering the stock, 18 advise a “Strong Buy,” three give a “Moderate Buy,” eight play it safe with a “Hold” rating, and the remaining one recommends a “Strong Sell.”

Although the stock is trading above its mean price target of $207.82, the Street-high target price of $275 from Wedbush suggests that Apple stock could rally more than 31%.

On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.