Wall Street bets on AI features to trigger a large-scale upgrade cycle, Apple's stock price is expected to achieve its best weekly performance in two years

According to Zhitong Finance and Economics APP, Apple (AAPL.US) investors finally have a roadmap on how the company will use artificial intelligence. In response, investors have driven Apple's stock price to its best performance in over two years in a single week. Since the beginning of this week, Apple's stock price has risen by nearly 9%, surpassing Microsoft (MSFT.US) on Thursday to once again become the world's most valuable company. Just on Monday, Apple lagged behind Microsoft and NVIDIA (NVDA.US), ranking third in global market capitalization. Meanwhile, Apple's market value has increased by over $700 billion since hitting bottom in April. The stock's "buy" rating is also approaching its highest level since 2017.

Wall Street is betting that new artificial intelligence features introduced by Apple for the iPhone - including the integration of ChatGPT with OpenAI - will trigger a large upgrade cycle among users who have been holding onto older iPhones. Jim Awad, Senior Managing Director at Clearstead Advisors, said investors "are more confident that Apple is back in the game and catching up in the competition." He added that considering the need to upgrade hardware to leverage artificial intelligence technology, the market will see a reacceleration in iPhone sales growth, with "Apple becoming a major beneficiary of artificial intelligence, and its stock price is catching up."

Although the outside world believes that Apple's 2024 Worldwide Developers Conference (WWDC24) lacked surprises, it alleviated concerns that have weighed on the stock this year. Wall Street had been concerned that Apple lacked an artificial intelligence strategy, especially compared to other large companies, and its progress in artificial intelligence had been slow. On the other hand, the company's valuation is also high, with a P/E ratio of about 30 times, higher than the long-term average level and higher than the Nasdaq 100 index's P/E ratio of about 27 times. These factors have limited the rise in Apple's stock price. So far this year, Apple's stock price has only risen by about 12%, ranking second worst among the "Big Seven" in the US stock market, only better than Tesla (TSLA.US), which has fallen by 27% since the beginning of the year.

The iPhone is the main contributor to Apple's revenue, accounting for over half of the company's revenue in the 2023 fiscal year. However, iPhone revenue in the 2023 fiscal year declined by 2%, reflecting an extended replacement cycle for millions of users.

With the introduction of artificial intelligence features, bulls believe that this will prompt these old iPhone users to upgrade their hardware. Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, said, "Those who were initially uninterested in Apple's initial announcement are quickly coming to believe that artificial intelligence will be the innovation that drives the next round of iPhone sales "We have to be realistic, performance confirmation will take time, but artificial intelligence may create growth that makes the stock price look cheap."

The potential need to upgrade hardware for iPhone users is very large. Bloomberg Intelligence stated that out of over 800 million iPhones, more than 40% are iPhone 12 or older models, while another 27% of users are using iPhone 13. Currently, less than 10% of users have phones that can support artificial intelligence software (i.e. iPhone 15 Pro, iPhone 15 Pro Max).

Melius Research analyst Ben Reitzes mentioned that due to the attractiveness of artificial intelligence, "we now have more confidence in our super cycle theory, which could even drive iPhone revenue to grow by around 20% in the next two years."

D.A. Davidson analyst Gil Luria upgraded his rating on Apple to "Buy." The analyst stated that the integration of enhanced search, enhanced photo editing, text generation, and other functions "will expand the application scope of artificial intelligence much more widely than we have seen so far," and "Apple is uniquely positioned to provide these functions and may be the only company capable of doing so in the near future."