Apple’s $471 Billion Rally Hinges On Whether AI Event Delivers

(Bloomberg) -- It’s the moment of truth for Apple Inc.’s artificial intelligence plans — and for the $471 billion rally that has rescued the stock from the doldrums.

AI is expected to be a central focus of the company’s annual Worldwide Developers Conference, which begins Monday, and optimism has been steadily growing. Investors are hoping new AI features will be enticing enough for consumers to pay up for the next generation of iPhones, countering the perception Apple has few catalysts for growth.

The conference is “the most important event for Apple in over a decade,” according to Wedbush. Such high expectations could invite disappointment if the event doesn’t deliver, especially as the stock trades at an elevated multiple. 

Shares fell 0.7% on Monday ahead of the event.

“If Apple doesn’t come out with compelling reasons to upgrade, that’s a real problem,” said Greg Martin, co-founder of Rainmaker Securities. “If the event is uninspiring, I think the stock will be stagnant for a while.” At the same time, he added, a positive event would be a catalyst. 

The stock has soared almost 20% off an April low, as of its last close, returning above a $3 trillion market valuation and pulling within 1% of a record close hit last year. While some of the rally reflects a positive earnings report from early May, where Apple announced the largest buyback in US history, improving sentiment about AI has also been central to the bull case.

Despite the recent gains, Apple’s year-to-date rise of 1.6% is paltry compared with the Nasdaq 100 Index’s 13% advance. Stocks with more concrete AI exposure — including Microsoft Corp., Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc. — have all posted double-digit gains. AI-focused chipmaker Nvidia Corp. has soared 147% so far this year, briefly overtaking Apple in size.

The underperformance reflects how growth at Apple has lagged well behind megacap peers. Revenue fell 4.3% in Apple’s fiscal second quarter, the fifth contraction in the past six quarters. Despite that, Apple trades around 28 times estimated earnings, a sizable premium to its 10-year average of 19. 

The multiple and lack of growth is why fewer than two-thirds of the analysts tracked by Bloomberg recommend buying the stock, a low ratio among megacaps.

Given that backdrop, the conference comes at a pivotal time. Investors are hoping new AI features will catalyze an iPhone upgrade cycle, reinvigorating growth in Apple’s most important product line while also supporting its high-margin services business. 

Bloomberg News has reported that Apple will announce an agreement with OpenAI at the conference, wherein it will integrate the company’s AI model into the iPhone’s operating system. This is likely to mean AI-supported features for the company’s native apps, including Siri, photos, music, and iMessage.

How much that moves the needle remains to be seen. Bernstein’s Stacy Rasgon writes that AI functionality on the iPhone “is likely to be useful and pervasive, but not necessarily revolutionary relative to what Google (and Samsung) have offered in their AI phones.”

Analysts are expecting limited short-term impact. The consensus for Apple’s full-year net earnings have barely budged over the past quarter, while the view for revenue is down 0.5% over that period. Estimates for 2025 revenue have also come down over the past three months.

“The event looks at least somewhat built into the stock, and Apple therefore needs to really come up with something new for the momentum to continue,” said Rick Bensignor, chief executive officer of Bensignor Investment Strategies and a former Morgan Stanley strategist. 

Tech Chart of the Day

Just over 60% of Nasdaq 100 Index components are above their 200-day moving average, the fewest since November and down from a peak of nearly 90% in January. The trend reflects how even though the tech-heavy index has performed well this year, most of the advance has come from its biggest components. While the Nasdaq 100 is up 13% this year, an equal-weighted version of the index is up just 3.5%.

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(Updates to midday trading.)

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