Personal electronics giant Apple (AAPL +2.62%) jumps off the page as a no-brainer winner in artificial intelligence (AI). There are many ways to integrate AI into iPhones, watches, and other Apple products. Wall Street has high expectations for the new iPhone 16, Apple's first iPhone launched with AI capabilities.
Renowned tech stock analyst Dan Ives recently estimated that 300 million iPhones worldwide are over four years old, setting the stage for a supercycle, a period when many consumers upgrade their devices, revving Apple's growth.
But is the stock poised to see the pop investors hope for?
Read this before buying Apple stock for its AI hype.
Is Apple Intelligence overhyped?
Apple's AI software, Apple Intelligence, will integrate large language models into iOS, creating new abilities and improving existing features, including upgraded Siri functionality. It is facing pressure to deliver a wave of iPhone upgrades. However, there are signs that it could fall short.
First, Apple Intelligence will only be available to a limited customer base on day one, with the beta version to be released next month. Additional features, including non-English versions, will launch months afterward. In other words, Apple Intelligence will hit the market in a slow trickle rather than an exciting burst.
NASDAQ: AAPL
Key Data Points
A research firm surveyed existing iPhone users this summer about their upgrade plans. According to the results, 73% of respondents plan to upgrade primarily because their phones are obsolete or damaged -- only 18% plan to upgrade due to new features. The June survey predates the unveiling of the iPhone 16 in September. Still, Apple unveiled Apple Intelligence in early June, and AI had already found its way into Android smartphones by then, so it would seem that AI would have been on people's minds at the time.
So far, early pre-order data is mixed. An industry analyst recently reported that early pre-orders for the standard iPhone 16 and iPhone 16 Plus were up 10% and 48%, respectively, over last year's pre-order levels. However, the higher-end Pro and Pro Max versions were down 16% and 27%.
At least so far, it's hard to call this the game-changing supercycle Apple hopes for.
Apple's stock is pricing in AI success
If the iPhone 16 falls short, the stock price could become an issue. You can see below that Apple has a long history of "lumpy" growth: A supercycle lifts Apple to new heights, followed by stagnation. Apple's last growth spurt came with the iPhone 12, its first with 5G network technology.
Since then, you can see that Apple's sales have plateaued. Yet, the stock's valuation has run higher, possibly on the assumption that AI will create another supercycle, pushing Apple to the next level.
AAPL Revenue (TTM) data by YCharts.
It's not easy growing earnings when you're a company large enough to generate nearly $400 billion in revenue. Apple is famous for its massive share repurchase programs, but earnings growth via buybacks likely won't be enough to support a price-to-earnings ratio (P/E) of nearly 35. Apple needs to grow past $400 billion in annual sales.
Should you buy Apple stock today?
Investors should consider both sides of the coin before buying shares today.
Suppose Apple blows past $400 billion in annual revenue and the iPhone 16 is a success. That's fantastic! The problem is that the stock has arguably priced that growth in already. Earnings could jolt higher, and Apple's valuation might only drop to a reasonable level. It's hard to envision enough earnings growth to make the stock cheap. Even if you double earnings-per-share, Apple's P/E ratio is still over 17, roughly where it traded before the pandemic.
On the flip side, if Wall Street deems Apple's AI iPhone cycle to be less than exceptional, the stock could experience a sharp decline. If the needle on earnings fails to move significantly, Apple's stock price would need to fall dramatically to recalibrate the P/E ratio to a more reasonable level for a large company facing growth challenges.
Granted that Apple is one of the world's most powerful brands and companies, but that doesn't guarantee that the stock will treat you well. Apple stock is in a precarious position, which should give investors pause before jumping aboard the AI hype train.
