May 16th, 2024 – ChatGPT maker OpenAI held its “Spring Update” event on Monday, where it announced a new desktop app, a web UI refresh, and the launch of its most advanced model, GPT-4o. The demo showcased how edge devices, starting with Macs and iPhones, can benefit from AI. By integrating voice, text, and images, the demo also highlighted AI’s potential to significantly boost productivity. Much of the demo utilized a “hardwired” Apple’s (AAPL) iPhone to reduce latency in real-time interactions.
In this context, analysts at Bank of America reiterated a Buy rating on AAPL, saying they expect the tech giant “to be a net beneficiary of AI at the edge” with “gross margin upside and momentum in services’ ‘. Among Apple Inc. (AAPL)’s renowned products are smartphones, personal computers, tablets, wearables, and accessories. The company also has a fast-growing services business that includes its iCloud cloud service and its digital streaming-content services, such as Apple Music and Apple TV+, and now its nearing partnership deal with OpenAI that would bring artificial intelligence tech to the next iPhone, Bloomberg reported.
The deal would help Apple establish itself as a benefactor of the AI boom while expanding OpenAI’s reach. Using OpenAI’s tech, Apple could upgrade Siri as the ChatGPT maker unveiled GPT-4o, a new and more capable model with voice capabilities. It is unclear what an OpenAI-Apple partnership would mean for Alphabet, as the iPhone maker is reportedly also in talks to use Google Gemini. As a major OpenAI investor, Microsoft could share some of the gains of the increased exposure of Open AI through an Apple partnership.
The tech giant has, through a a may 2, 2024 press conference , posted quarterly revenue of $90.8 billion, down 4 percent year over year, and quarterly earnings per diluted share of $1.53, including an all-time revenue record in services, renewing the market’s trust towards the stock, expressed through Goldman Sach’s reiteration of its Buy rating on Apple Inc. (NASDAQ:AAPL) with a steady stock price target of $226.00 . Apple can hence count on strong brand recognition and loyal customers, a fidelity built through a total commitment to the creation of innovative products and services, high quality products with unique features and state of the art technology.
Nonetheless, the second quarter has shown some slowdown in Apple’s advancement, since KeyBanc reported that April’s data for Apple is “modestly disappointing”. The move comes as the investment bank said its Key First Look Data (KFLD) data showed that indexed spending fell 17% month-over-month in April, which aligns with the three-year average. Explanations for this can be found in several places, such as premium prices, which of course reflect high quality technology, but at the same time cut off a non-negligible consumer share, as much as the lack of innovative new products in recent years. As a matter of fact, in recent years, Apple has not been as successful in introducing new and innovative products as in the past. Last but not lease there’s a strong complacency sense in the face of increasing competition. As fierce competition continues to grow, Apple has resorted to brand recognition rather than investing in research and development or innovation initiatives to keep up with the times. Although this strategy may have worked well in the past, it is becoming increasingly apparent that relying solely on brand recognition will not be enough in the future to keep up with the rapidly developing products and services of rivals.
On the opportunity side, there’s a couple ways the tech giant might intervene, such as leverage strong brand image to enter emerging markets. With more than 1.8 billion active devices expected to be in use by 2024, Apple’s colossal size and reach are unmatched among tech companies around the world. Through an effective marketing strategy consisting of ads that leverage Apple’s iconic brand logo and name recognition, they have the potential to take advantage of untapped opportunities available in these new regions for billions of dollars. Moreover, in recent years, Apple has shifted its focus to content streaming services in response to rapidly growing consumer demand for video and audio streaming. To take advantage of this growing trend, Apple has launched several successful streaming services, such as Apple Podcasts, Apple Music, and Apple TV+. Predictably, their long-term strategic investments strongly suggest an ongoing commitment to becoming a major player in the content streaming space.
Threats wise, issues weighing on Apple stock include weak iPhone sales in China and legal problems over its App Store policies in Europe. Investors also are concerned about Apple lacking a strategy for artificial intelligence. Apple is playing catch-up with Big Tech rivals in AI, especially generative artificial intelligence. The company’s AI initiative is going to be a costly undertaking and profits could take a near-term hit, according to Deepwater Asset Management. These events show a fierce competition, which Apple doesn’t seem to be exceptionally aware of, nonetheless a rapidly advancing technological advancement, whose pace, Apple, doesn’t seem to share.
Lastly, with its 3-star rating, according to many authoritative sources, it is believed that Apple’s stock is fairly valued compared with the long-term fair value estimate of $160 per share. The aforementioned valuation implies a fiscal 2024 adjusted price/earnings multiple of 25 times, a fiscal 2024 enterprise value/sales multiple of 7 times, and a fiscal 2024 free cash flow yield of 4%. Services are Apple’s next-biggest revenue contributor over the forecast, and it predicts 8% growth in revenue here. This segment is largely driven by revenue from Google (thanks to its status as the default search engine on the Safari browser) and Apple’s cut of App Store sales. A growth in overall app revenue is anticipated, but progressively lower cuts are going to Apple because of regulatory pressures, resulting from the recent litigation against the DOJ, which alleges that Apple violated Section 2 of the Sherman Antitrust Act by monopolizing and attempting to monopolize parts of the smartphone industry. Apple is at constant risk of disruption, just as the iPhone disrupted BlackBerry in the budding smartphone market, hence the stock is endowed with a Medium Uncertainty Rating. The firm’s greatest risk lies in its reliance on consumer spending, for which there is great competition and cyclicality.
Author: Diego Andretta