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Apple's AI Ambitions: Is Now the Time to Buy Before WWDC Reveal?

Samuel Brooks
03:43pm, Saturday, May 25, 2024
Illustration by StockInvest.us

Shares of Apple (NASDAQ: AAPL) have lagged behind the broader market over the past year. Concerns linger that other tech giants like Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) are outpacing the Cupertino-based company in the race for artificial intelligence (AI) dominance. However, the tide could turn as Apple gears up to unveil its AI strategies at the Worldwide Developers Conference (WWDC) on June 10. With shares climbing 16% in the last month in anticipation, let’s delve into what this means for potential investors.

Apple is well aware of the massive potential AI holds for driving device sales. The company has funneled over $100 billion into research and development over the past five years, with AI-specific research reportedly consuming over $1 billion annually.

But this isn’t a case of throwing money at a trend and hoping for the best. During the fiscal second-quarter earnings call, CFO Luca Maestri elaborated on a hybrid investment strategy. “We have a bit of a hybrid model where we make some of the investments ourselves. In other cases, we share them with our suppliers and partners,” Maestri said. By collaborating with third parties, Apple aims to introduce new AI services without building a multibillion-dollar infrastructure independently.

In line with this strategy, Apple is exploring third-party AI features for iPhones. Such collaborations could be a cost-effective way to enrich iOS without extensive internal development. The next iOS update—expected to be iOS 18—will likely showcase several AI improvements requiring Apple’s most advanced chip. This could prompt users of older iPhones to upgrade, thereby elevating Apple's revenue and margins.

The Wall Street consensus forecasts Apple’s earnings to hit $8.01 per share by fiscal 2026, hinting at a 30% upside if the forward price-to-earnings ratio remains stable. Yet, these estimates might undervalue AI’s impact on iPhone demand, suggesting investors are getting a fairly valued stock with potential for positive surprises.

Given Apple’s recent underperformance, now might be the opportune moment to invest ahead of its anticipated AI reveal. But remember, diversification is key.

About The Author

Samuel Brooks