It may seem that Cupertino-based giant Apple (NASDAQ:AAPL) has fallen behind its Big Tech peers in the race for AI, as the company has only achieved a modest performance of just 3% this year compared to the “Magnificent Seven” group of leading technology companies. However, several reasons justify my bullish stance on Apple. In this article, I’ll outline three of them: Apple’s advancements in AI, the potential growth in China, and the company’s robust fundamentals and strategic share buybacks.
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AI Is Finally Playing Its Game on AAPL
Since last year, Apple has made some moves to catch up with its peers, but it is still far from leading the pack. This has sent a bearish wave through the stock, causing the Cupertino company’s share price to be stuck in second gear.
But that doesn’t mean that Apple isn’t making any progress on AI. The Cupertino-based company has been on a shopping spree, acquiring 32 AI start-ups in 2023—more than any other tech giant, which indicates the company’s efforts to expand its AI capabilities. However, as the old saying goes, “Rome wasn’t built in a day,” and it seems the market is ignoring this fact, as other tech companies appear to be more advanced with their AI developments.
I believe part of the market’s skepticism towards Apple and its early AI efforts has been influenced by the launch of the VisionPro, the “magic” virtual reality glasses powered by AI and machine learning. The VisionPro has received mixed reviews, with some users calling it a dud and others praising its immersive experiences. The steep $3,500 price tag hasn’t helped its case, either, making it a tough sell for the average consumer.
Additionally, Apple has faced challenges in production and demand forecasts, with reports of slashed production numbers and fading hype.
In reality, VisionPro was just Apple’s first step into AI. But Apple has also been working on its own large language models (LLMs) and has even developed a chatbot, although it has yet to define how it will unveil it to the general public. A significant step will be taken when this model is integrated into the hardware. This integration is expected to begin with the launch of the AI App Store in June during its prestigious WWDC developers’ conference.
Eventually, Apple will integrate AI and LLMs into its hardware. There is also great anticipation regarding Siri’s on-device AI capabilities, such as real-time analysis using the iOS 18 camera.
In short, when AI is integrated into Apple’s massive user base of two billion active iPhones, not counting other iOS devices, it’s very likely that Apple will be taken more seriously regarding its AI capabilities.
China May be Shifting from a Headwind to a Tailwind
iPhone demand in China has been a black eye for Apple throughout this year. The iPhone, Apple’s core segment and accounting for 54% of its revenues, has exposed the company’s over-dependence on a single line of business.
China is a crucial market for Apple, but local competition, especially from Huawei, has been gaining ground. A report earlier this year highlighted that Huawei has been eating into Apple’s market share, leading to a 19.1% drop in iPhone sales in China during Q1. Meanwhile, Huawei’s sales surged by 69.7%, driven by a significant upgrade in its new smartphone model after months of struggling to secure parts due to Western sanctions.
However, what currently looks like a black eye could soon turn into a silver lining. Wedbush’s perma-bull analyst Dan Ives suggests that while current economic data in China doesn’t indicate a turnaround, a rise in upgrades could shift the narrative. There are 225 million iPhones in China, and 70% of these haven’t been upgraded in the last three years. Ives’ theory is that many of these consumers are moving to Pro models, which boosts the average selling price (ASP) of iPhones in China.
Robust Fundamentals and Share Buybacks
In addition to the two reasons mentioned above, I believe Apple’s extraordinarily robust fundamentals round out the case for why Apple stock may still have significant upside potential and recover from its lackluster performance so far this year.
First off, Apple’s fundamentals remain rock solid. Even though market fears have dampened hardware demand amid unimpressive economic growth, Apple is far from a struggling company. Services have been a major bright spot.
Take its most recent quarter, for example. Despite iPhone sales dropping 12% year-over-year and product revenues falling 10% year-over-year, services revenue jumped 14.2% year-over-year, hitting an all-time high. This growth in services helped minimize the overall 4.3% drop in net sales, allowing Apple to beat market estimates in both EPS and revenues.
In my view, since Apple operates across two main segments—products and services—the latter is where the company’s valuation could see the most growth, especially with the potential AI adoption cycle. The high scalability of the App Store and Apple TV+ further supports this potential.
Moreover, Apple has generated a massive amount of cash—$336.6 billion over the last three years. Plus, the board recently authorized an additional $110 billion for share buybacks, an amount large enough to purchase almost all the shares of Lockheed Martin (NYSE:LMT), just to give you an idea.
With this move, Apple has shown a clear interest in pleasing investors who are anxious about its share price’s underperformance this year compared to other big tech companies. As a result, AAPL stock has soared more than 11% since announcing its results, demonstrating its historic ability to bounce back from valuation declines.
Is AAPL Stock a Buy, According to Analysts?
The Wall Street consensus on AAPL stock is largely bullish. Out of the 34 Wall Street analysts who have provided recommendations and target prices on the company in the last three months, 22 have issued a Buy rating, 11 have issued a Hold rating, and only one has issued a Sell rating. The average AAPL stock price target is $207.72, indicating upside potential of 8.1%.
The Bottom Line
Despite fears that Apple has missed the AI bandwagon and a few other headwinds, Apple shares have underperformed compared to their big tech peers. But from my perspective, it’s only a matter of time.
June will be a key month for Apple, particularly with advances in AI, which should bring a new cycle of updates for iPhones and potentially mark a turning point for the company.
Given Apple’s extremely solid fundamentals—evidenced by a monumental buyback announcement and significant growth in services that could be the major catalyst for Apple around AI—I remain bullish on the stock.
