Apple’s (AAPL) stock has been the beneficiary of heightened investor enthusiasm after the company announced its Apple Intelligence strategy- a significant upgrade cycle for the iPhone and other premium technology devices it sells in the near term. However, over five years, growth rates from Apple’s integration of AI may not be sustained. As a result, I think Apple is overvalued, and as a long-term investor, I am neutral on the stock.
Apple Intelligence Leads to Growth in iPhone Sales
Apple has recently garnered considerable attention for its planned integration of advanced AI into its operating system, including a famous deal with OpenAI. Apple’s early development of its neural engine, which allows for seamless AI integration, arguably places it ahead of many competitors who are only now incorporating neural processing units into their devices.
Latest reports indicate that nearly half of current iPhone users, who are not using the iPhone 15, are likely to upgrade to the iPhone 16 to utilize the enhanced AI features. Furthermore, Morgan Stanley estimates that Apple could sell approximately 500 million iPhones over the next two years, driven by the demand for AI capabilities.
Wedbush analysts suggest that the AI upgrade cycle, particularly with the iPhone 16, could propel Apple’s market cap to $4 trillion. They have termed this period the “golden upgrade cycle,” and they are one of many investment banks with a very optimistic outlook for Apple after its Apple Intelligence announcement.
Will the Valuation Expand Amid New Market Enthusiasm?
Some investors believe Apple’s valuation multiples will expand due to new enthusiasm for Apple Intelligence. Although I think this is possible, I also believe the multiple expansion is somewhat speculative when considering Apple’s long-term prospects. As mentioned above, I am not certain that the AI upgrade cycle will have a lasting effect on the company’s fundamental growth rates.
Nonetheless, Loop Capital has raised its price target for Apple stock to $300, indicating a fair market value of $4.6 trillion. Furthermore, JPMorgan (JPM) has increased its price target to $245, reflecting confidence in the AI-driven upgrade cycle. Additionally, Apple stock has recently hit all-time highs, reflecting the market’s trust in the stock.
I believe the AI upgrade cycle could generate a significant upside over the next couple of years. Morgan Stanely predicts that Apple could generate up to $488 billion in iPhone revenues over Fiscal years 2025 and 2026 due to AI. In the 2023 and 2024 Fiscal years, Apple is projected to generate $399 billion in iPhone sales, indicating a possible 22% revenue increase.
Long-Term Downside Risks Amid Plateauing Future Growth
While the short-term price growth related to AI is likely to be significant for Apple, there is the chance of volatility once the initial upgrade cycle comes to an end. My primary concern with the long-term Apple AI investment thesis is that the company may end up in the same position as before, struggling to deliver growth once most of its users are already equipped with Apple Intelligence iPhones.
That being said, management may be able to capitalize on new AI technologies and make these exclusive to future models. It’s still early days in the development of consumer AI, therefore, Apple may be exposed to many more high-growth opportunities related to intelligent technology in the future. However, there is little evidence for this yet, and the company has notably struggled with innovation in recent years. That is why I remain neutral on the stock for now.
Analysts Rate Apple a Moderate Buy
Turning to Wall Street, Apple has a Moderate Buy consensus rating based on 25 Buys, nine Holds, and one Sell assigned in the last three months. At $236.00, the average Apple price target implies a 7.85% upside potential.
This shows that the recent surge in stock price has already priced in a lot of the upside from Apple’s AI integrations. Apple’s stock price has gained 8% over the past month following the announcement of Apple Intelligence.
Takeaway: Apple Is Overvalued Amid AI Exuberance
In the near term, I think a lot of the growth potential related to AI has already been priced into Apple stock. As a result, I believe the company may be overvalued, if not on a 12-month horizon, then certainly over five years or more.
My research indicates that Apple’s long-term growth related to AI is somewhat speculative and that the coming upgrade cycle is likely to be a short-term event to boost growth. As such, I remain neutral on Apple despite its long-term potential to continue accruing revenue and profitability gains from implementing consumer and enterprise AI.
