Artificial intelligence (AI) has been a driving force in the ongoing market rally, but Nvidia isn’t the only game in town.
Since the advent of artificial intelligence (AI) early last year, the star of the show has been Nvidia. The company pioneered the graphics processing units (GPUs) that have become the gold standard for AI training and inference applications. This, in turn, has resulted in a blistering run for the stock, which has gained 639% (as of this writing) since early last year. As a result, Nvidia’s market cap has grown by leaps and bounds, currently valued at $2.6 trillion.
Yet concerns about the growing threat of competition and Nvidia’s premium valuation have some investors looking for other ways to profit from AI — and they don’t have to look far. One company is about to get swept up by the tailwinds of AI, driving its market cap to more than $4 trillion over the coming year or so — iPhone maker Apple (AAPL -0.70%).
The stock’s pedigree is undeniable. Since its IPO in 1980, Apple has delivered gains of 225,071%. That stratospheric rise isn’t limited to the distant past, either. Apple soared 792% over the past 10 years (as of this writing), more than four and a half times the return of the S&P 500.
Yet Apple stock could soar even higher on the secular tailwinds of AI. Let’s review the factors that could push the iPhone maker above $4 trillion.
Image source: Getty Images.
Growth on hold
Investors might not be thinking of Apple as a supercharged growth stock, but its record is undeniable. Over the past decade, the company’s revenue has grown 104%, while its net income has climbed 153%, which has fueled its soaring stock price.
Apple’s growth has come as the company has captured an ever-increasing share of the smartphone market. In the list of top 10 smartphones of 2023, Apple devices took the top seven spots, according to data supplied by Counterpoint Research. What makes that achievement all the more remarkable is that it occurred during one of the worst economic downturns in decades.
Now that the specter of inflation is fading, consumers will be more likely to upgrade their devices. Wedbush analyst Dan Ives estimates there are roughly 300 million active iPhones that haven’t been upgraded in more than four years. Improving economic conditions will leave people with more discretionary income, increasing the likelihood they will opt for a new iPhone when Apple’s new models are unveiled next week. Ives estimates the company could sell as many as 240 million iPhones in fiscal 2025, kicking off an AI-driven upgrade “super cycle.”
The AI wild card
While some users snap up the newest iPhone as soon as it becomes available, many tend to wait for a major upgrade before laying out their hard-earned cash for a new device. The upcoming model is expected to be a doozy. While Apple is playing its cards close to the vest, the company is expected to unveil the first iPhone featuring generative AI capabilities, marking a new chapter for Apple.
At the company’s Worldwide Developer Conference (WWDC) in June, Apple provided the first look at Apple Intelligence, a suite of AI-powered features that will be included in an upcoming iOS update. These include:
- AI-powered summaries in Mail and Messages
- Voicemail transcriptions
- Improved photo searches
- Long-awaited improvements to Siri
- Troubleshooting help for Apple devices
- Image and text generation
- Integration of OpenAI’s ChatGPT
Wall Street and Main Street alike have been captivated by the potential of generative AI, and many iPhone users will be interested to see what Apple brings to the table.
The case for $4 trillion
Make no mistake: Apple’s results have always been tied to sales of its flagship iPhone, and that’s unlikely to change anytime soon. During the first nine months of fiscal 2024 (which will end in September), the iPhone was responsible for 52% of Apple’s total sales, so the path to $4 trillion goes through the iPhone.
According to Wall Street, Apple is poised to generate revenue of $390 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 8.6. Assuming its P/S remains constant, Apple would have to grow its revenue to roughly $465 billion annually to support a $4 trillion market cap. The company could conservatively surpass this threshold by early 2027.
Ives is more bullish. He believes that if Apple introduces compelling AI technology with its up-and-coming iPhone — and I believe it will — this will act as the linchpin for the next phase of the company’s growth. Not only will Apple likely sell the aforementioned 240 million iPhones in fiscal 2025, but the accompanying sales of hardware and software will combine to add $30 to $40 to Apple’s share price, pushing its market cap above $4 trillion over the coming 12 to 18 months.
It’s important to remember this is fun with math, but the underlying thesis is sound. Earlier this year, Apple revealed there were 2.2 billion active devices in the world, including an estimated 1.4 billion active iPhones, according to online data company Statista. A compelling new AI-powered iPhone could be the catalyst for a significant upgrade cycle.
Apple is currently selling for a premium at roughly 33 times earnings, but given its track record of growth, I’d argue it’s deserved. Furthermore, when the aforementioned “super cycle” plays out — and I have no doubt it will — this price could end up being a bargain.