(Bloomberg) — For two decades, no company has epitomized stock market expectations more than Apple. The company transformed from a niche computer maker to the most valuable company on the planet, and its stock became the cornerstone of investment portfolios around the world.
Most Read Articles on Bloomberg
But quickly, Apple's shine is beginning to fade. Artificial intelligence is now a hot topic in technology, driving the kind of growth the company once hoped to sell gadgets and services to eager consumers around the world.
This has Apple investors confused. The company's revenue growth has stalled, and its stock is about 16 points below the Nasdaq 100 index, its highest annual level since 2013. The company is still generating huge profits, but will it be able to continue to grow at the pace investors expect? is an open question. Apple executives say they have big plans for AI, which bulls hope will lead to a return to growth. But for now, that outlook is difficult to gauge.
All of this has investors wondering what would happen to Apple's stock price today if its AI dreams don't come true.
“It's becoming a value stock, similar to Coca-Cola,” said Phil Brancato, CEO of Ladenburg Thalmann Asset Management and chief market strategist at Ozaik. “We need anything that will provide us with a defensive profile and market-rate returns for the foreseeable future until new catalysts come along.”
Apple remains as reliable a money machine as ever. It's certainly a shareholder-friendly cash flow behemoth and a safe haven with a perfect balance sheet.
“If you're looking for solid, steady growth — very pension-like growth — in a business that's expanding margins, increasing profitability, generating lots of cash, and still has a lot of runway for innovation.” If you're a long-term investor who really likes that, we think Apple is that kind of company.''It's a great place to be,'' said Kevin Walksch, portfolio manager at Jensen Investment Management.
But investors looking to tap into the next big growth market are turning to AI. Nvidia Corp. is seeking to supplant Apple as the technology giant due to seemingly insatiable demand for chips used to power large-scale language models.
Rating wipeout
Apple has fallen more than 10% this year, losing about $330 billion in market value and losing its title to Microsoft Corp. as the world's most valuable company. Microsoft is starting to boost revenue growth by incorporating ChatGPT into products such as Office software. Currently, Microsoft's market value is approximately $3.1 trillion, compared to Apple's $2.7 trillion. Nvidia, whose sales and profits have soared in the arms race for AI computing power, isn't far behind at $2.2 trillion.
Read more: Microsoft dethrones Apple as world's most valuable stock
The problem isn't so much that Apple's growth suddenly stopped, it's that it's been happening for a while—even as the stock price was setting records, the company's revenue fell by 20% in each quarter of the last fiscal year. It was decreasing. The problem is that the company has nothing to show for AI at a time when iPhone sales are slowing and the company faces growing regulatory threats.
“We are experiencing an incredible wave of innovation,” said Mark Lehman, CEO of Citizen JMP Securities. “The market is telling us Apple has a lot to prove here, but so far they haven't proven much.”
Apple, notoriously secretive, has revealed little about its plans to incorporate AI services into its products. Chief Executive Officer Tim Cook has promised that Apple will “break new ground” in AI this year, and market experts say the company's annual software developer conference will be held in the coming months. I hope that big news will be announced. But many investors are losing patience and turning to stocks with a clearer path to AI.
Read more: Apple acquires Canadian AI startup as part of race to add features
At the heart of Apple's woes is a lack of revenue growth, and it's unclear what will fuel it. Vision Pro headsets, the company's first major new product category in nearly a decade, are not expected to contribute significantly to growth for the next few years. Apple recently halted its long-standing efforts to develop an electric car. At the same time, iPhone profits stagnated and sales in China declined due to the economic downturn and increased competition.
regulatory pressure
On top of that, Apple faces increasing pressure from regulators. Earlier this month, Apple was fined about $2 billion by the European Union over an investigation into allegations that it blocked music streaming rivals on its platform. In the United States, the Justice Department filed an antitrust lawsuit after spending five years preparing a lawsuit alleging that Apple imposed software and hardware restrictions on iPhones and iPads to stifle competition from rivals. seems to be close to being proposed.
Sales are expected to decline 3% in fiscal 2023 and rise just 2% this year, according to data compiled by Bloomberg. In comparison, sales in 2021 increased by 33%. Meanwhile, sales for both companies this fiscal year are expected to grow 79% for Nvidia and 15% for Microsoft.
Over the past few years, Apple has commanded a premium valuation comparable to Microsoft. When tech stocks took a big hit two years ago, the stock held up much better than its peers. But that's no longer the case. Apple's stock price is about 25 times expected earnings over the next 12 months, down from about 30 times last summer. This is similar to Walmart's valuation. On the other hand, Microsoft's stock price is 32 times, and NVIDIA's is 35 times.
Read more: Apple investors' loyalty rewarded with $454 billion gift
That said, Microsoft trading at record highs may actually be a good example of Apple's long-term potential. When Satyanadera took over the company in 2014, his 20th-century-minded software maker was struggling with its stock price. It's now everywhere, from the cloud to AI, and its stock price is skyrocketing.
“Everyone has to reinvent themselves, and that shows how fast the technology revolution is,” said Citizens JMP's Lehman. “Microsoft was finally starting to move, but it took him 15 years to figure it out.”
Despite this year's bleak results, it's easy to argue that Apple stock is poised for a rebound and that it's too early to exclude it from the AI race. The company has more than $170 billion in cash on its balance sheet, and net income is expected to exceed $100 billion this year. This gives Apple unparalleled resources to expand into new markets and return cash to shareholders through dividends and share buybacks.
“It's hard not to draw comparisons to what's hot right now,” said Wolksch of Jensen Investment Management. “If we took AI and sensationalism out of the equation now, would people view Apple differently? I think they would.”
Most Read Articles on Bloomberg Businessweek
©2024 Bloomberg LP
