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Does Apple's (AAPL) AI Focus Make it a Buy Ahead of WWDC?
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Apple’s (AAPL - Free Report) annual Worldwide Developers Conference (WWDC), scheduled on Jun 10, is expected to provide a glimpse into the iPhone maker’s AI endeavors. It is highly anticipated that the iOS 18 release will offer AI features, including a more intelligent Siri.
Apple has been playing catch-up in the AI space compared with Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) and Amazon (AMZN - Free Report) , its peers in the “magnificent seven” group.
Its competitive position is expected to improve with AAPL’s focus on adding a plethora of AI-enabled features that automatically generate playlists for Apple Music, edit photos through written or spoken commands and create custom emojis.
A plausible collaboration with Microsoft-backed OpenAI will give iPhone users access to ChatGPT. Safari is expected to get an upgrade with a new intelligent search feature.
Apple is expected to launch its first major software update with visionOS 2 for its mixed-reality device Vision Pro at WWDC. It is also expected to add a few AI-enabled updates to iPadOS 18 and macOS 15.
Apple CEO Tim Cook has expressed his enthusiasm over the opportunities with Generative AI (GenAI). In the fiscal second-quarter earnings call, Cook stated that Apple enjoys a significant advantage in the AI space due to “Apple’s unique combination of seamless hardware, software and services integration, groundbreaking Apple’s silicon, with our industry-leading neural engines and our unwavering focus on privacy.”
Apple has been active on the acquisition front to boost its footprint in the AI space. It acquired nearly 32 AI start-ups in 2023 alone. Moreover, it has been looking for a partner to harness the abilities of cloud-based GenAI.
Per sources, including Bloomberg, it has been actively involved in discussions with Alphabet to license Google’s Large Language Model (LLM), Gemini, for the iPhone. Apple reportedly has developed its own LLM called AppleGPT based on a framework called Ajax.
Integration of AI and LLMs into Apple devices — iPhone, iPad, and Mac — will make them faster and more efficient, thereby providing an impetus to its already massive installed base for upgrades. This is expected to drive top-line growth in the long haul.
Apple’s robust Services business, strong cash balance ($162.34 billion as of Mar 30, 2024) and record share buyback program worth $110 billion are other positives.
Stiff Competition, China Worries Hurt AAPL’s Near-Term
Apple shares have returned 1% year to date, underperforming the Zacks Computer & Technology sector’s 16.1% growth. It has suffered from stiff competition and weak iPhone sales in China.
China’s growth remains a worry for Apple due to stiff competition from local smartphone makers, including Huawei. The Chinese government’s directive to state officials not to use non-Chinese phones for work has been detrimental to the iPhone’s demand.
Per Canalys data, the Mainland China smartphone market witnessed 67.7 million units of shipment in first-quarter 2024. Huawei led with a 17% market share, shipping 11.7 million smartphones, while Apple sold 10 million units, down 25% year over year, most among the top five vendors.
The issues forced Apple to cut retail prices, which drove iPhone smartphone shipments in April (up 52% year over year) and is also expected to have benefited May sales. However, Apple is suffering from a lack of GenAI capabilities in the iPhone.
Canalys forecasts that Gen AI-capable smartphones will reach 12% of shipments in 2024 in mainland China, ahead of the global average of 9%. Xiaomi led the GenAI-capable smartphone market with its flagship 14 series in the first quarter of 2024.
Conclusion
Apple’s near-term prospects remain foggy due to sluggish China sales amid stiff competition. It expects the June quarter’s (third-quarter fiscal 2024) revenues to grow low-single-digit year over year. Unfavorable forex is expected to hurt revenues by 2.5%.
The Zacks Consensus Estimate for revenues is currently pegged at $83.07 billion, indicating 1.55% year-over-year growth. The consensus mark for earnings has remained unchanged at $1.33 per share over the past 30 days.
Moreover, Apple is trading at a premium with a forward 12-month P/E of 27.75X compared with the Zacks Computer-Mini industry’s 27.03X and higher than the median of 27.37X, reflecting a stretched valuation.
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Does Apple's (AAPL) AI Focus Make it a Buy Ahead of WWDC?
Apple’s (AAPL - Free Report) annual Worldwide Developers Conference (WWDC), scheduled on Jun 10, is expected to provide a glimpse into the iPhone maker’s AI endeavors. It is highly anticipated that the iOS 18 release will offer AI features, including a more intelligent Siri.
Apple has been playing catch-up in the AI space compared with Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) and Amazon (AMZN - Free Report) , its peers in the “magnificent seven” group.
Its competitive position is expected to improve with AAPL’s focus on adding a plethora of AI-enabled features that automatically generate playlists for Apple Music, edit photos through written or spoken commands and create custom emojis.
A plausible collaboration with Microsoft-backed OpenAI will give iPhone users access to ChatGPT. Safari is expected to get an upgrade with a new intelligent search feature.
Apple is expected to launch its first major software update with visionOS 2 for its mixed-reality device Vision Pro at WWDC. It is also expected to add a few AI-enabled updates to iPadOS 18 and macOS 15.
Apple Inc. Price and Consensus
Apple Inc. price-consensus-chart | Apple Inc. Quote
AI Focus Aids AAPL’s Long-Term Prospects
Apple CEO Tim Cook has expressed his enthusiasm over the opportunities with Generative AI (GenAI). In the fiscal second-quarter earnings call, Cook stated that Apple enjoys a significant advantage in the AI space due to “Apple’s unique combination of seamless hardware, software and services integration, groundbreaking Apple’s silicon, with our industry-leading neural engines and our unwavering focus on privacy.”
Apple has been active on the acquisition front to boost its footprint in the AI space. It acquired nearly 32 AI start-ups in 2023 alone. Moreover, it has been looking for a partner to harness the abilities of cloud-based GenAI.
Per sources, including Bloomberg, it has been actively involved in discussions with Alphabet to license Google’s Large Language Model (LLM), Gemini, for the iPhone. Apple reportedly has developed its own LLM called AppleGPT based on a framework called Ajax.
Integration of AI and LLMs into Apple devices — iPhone, iPad, and Mac — will make them faster and more efficient, thereby providing an impetus to its already massive installed base for upgrades. This is expected to drive top-line growth in the long haul.
Apple’s robust Services business, strong cash balance ($162.34 billion as of Mar 30, 2024) and record share buyback program worth $110 billion are other positives.
Stiff Competition, China Worries Hurt AAPL’s Near-Term
Apple shares have returned 1% year to date, underperforming the Zacks Computer & Technology sector’s 16.1% growth. It has suffered from stiff competition and weak iPhone sales in China.
China’s growth remains a worry for Apple due to stiff competition from local smartphone makers, including Huawei. The Chinese government’s directive to state officials not to use non-Chinese phones for work has been detrimental to the iPhone’s demand.
Per Canalys data, the Mainland China smartphone market witnessed 67.7 million units of shipment in first-quarter 2024. Huawei led with a 17% market share, shipping 11.7 million smartphones, while Apple sold 10 million units, down 25% year over year, most among the top five vendors.
The issues forced Apple to cut retail prices, which drove iPhone smartphone shipments in April (up 52% year over year) and is also expected to have benefited May sales. However, Apple is suffering from a lack of GenAI capabilities in the iPhone.
Canalys forecasts that Gen AI-capable smartphones will reach 12% of shipments in 2024 in mainland China, ahead of the global average of 9%. Xiaomi led the GenAI-capable smartphone market with its flagship 14 series in the first quarter of 2024.
Conclusion
Apple’s near-term prospects remain foggy due to sluggish China sales amid stiff competition. It expects the June quarter’s (third-quarter fiscal 2024) revenues to grow low-single-digit year over year. Unfavorable forex is expected to hurt revenues by 2.5%.
The Zacks Consensus Estimate for revenues is currently pegged at $83.07 billion, indicating 1.55% year-over-year growth. The consensus mark for earnings has remained unchanged at $1.33 per share over the past 30 days.
Investors should wait for a better entry point for Apple, which currently has a Zacks Rank #3 (Hold), given the modest growth prospect in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moreover, Apple is trading at a premium with a forward 12-month P/E of 27.75X compared with the Zacks Computer-Mini industry’s 27.03X and higher than the median of 27.37X, reflecting a stretched valuation.