Apple (AAPL -1.04%) stock has finally joined the artificial intelligence (AI) race.
Announcing a tie-up with OpenAI earlier this month, the iEverything giant said it will integrate ChatGPT artificial intelligence into future high-end models of its iPhones, iPads, and Mac computers. The stock is up roughly 9% already in response to the news, and according to wealth management firm Bernstein, Apple could be worth even more.
On Friday, Bernstein raised its price target on Apple stock to $240 a share, implying a 15% price gain over the next 12 months.
Is Apple stock a buy?
Bernstein sees four ways Apple could benefit from the AI megatrend:
- Because older iPhones won’t be capable of running on-device AI, people will need to buy newer, more expensive Apple devices. For every 1% acceleration in the upgrade cycle, Bernstein calculates Apple’s revenue will grow by 1.8%.
- Apple should be able to grow high-margin advertising revenue from AI searches on these new iPhones.
- AI apps downloaded on these new iPhones will generate high-margin app sales.
- With Apple serving as the gatekeeper to these apps, it will generate commission revenue on e-commerce with these apps.
So far, so good. But here’s where Bernstein’s Apple logic turns weird.
Bernstein raised its price target by $45 to the new $240 target and continues to recommend buying Apple at $209 a share. Granted, Bernstein’s old target was only $195, so it had to raise its price target somewhat to justify recommending the shares. But Bernstein admits that even at its current share price of $209, Apple stock is already “no longer inexpensive.”
And Bernstein is right. Apple stock already costs more than 32.5 times trailing earnings, and 32.5 times free cash flow as well. But most analysts see it growing profits more slowly than 12% annually over the next five years, even with the boost from “Apple Intelligence” — assuming that boost even materializes.
Bernstein is right that Apple stock is expensive. It’s wrong to tell investors to buy Apple stock at this time.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.