Apple's AI Adoption Could Push Prices Way Higher

While the company had its best days behind it and the rate of innovation had slowed, Apple’s Worldwide Developer Conference (WWDC) last week did not disappoint. Investors initially sold off the stock; however, the price rebounded subsequently and is currently trading at a fresh record high.

The introduction of iOS18 and Apple intelligence at WWDC is poised to fuel a multi-year upgrade cycle across Apple’s extensive installed base of billions of devices. This strategic initiative is expected to drive sustained innovation and revenue growth in the coming years.

The company continues to exhibit robust fundamentals and last week’s conference underscored the potential for a multi-year hardware upgrade cycle and significant growth in Services revenue.

Apple was the only one among the big tech companies that did not announce artificial intelligence (AI) adoption over the past year. While some investors believe Apple’s share price rally will continue, others are of the view that the excitement around the announcement on AI or what Apple rephrased Apple Intelligence would fade soon.

In our view, Apple’s rally could extend in the coming year, despite the currently elevated valuation multiples, as the company seems poised to embark on one of its biggest growth phases with Apple Intelligence.

Financial Strength and Growth Potential

Apple posted a YoY fall in revenues in the last fiscal year, with analysts expecting the company’s sales to rise by just under 1% in the current fiscal year ending in September. However, Apple is in a solid financial health, with $67.15 billion in cash and short-term investments, supplemented by $95.19 billion in marketable securities.

Apple’s strong profitability, exceeding $100 billion annually in net income, EBITDA, and free cash flow, supports sustained dividend payments, share buybacks, and future investments without excessive leverage. Este financial robustness, alongside innovations like the AI advancements announced at WWDC, reinforces Apple’s position as a leading force in the technology sector.

Apple’s consistent product innovation and financial strength bode well for its future growth prospects. Despite the sharp post-WWDC share price movement, the bullish sentiment surrounding the stock is likely to persist for longer as more and more investors begin to recognise Apple’s long-term growth potential.

Since Apple’s latest iPhone will likely go on sale in September, the company will realize revenues from the product in the next fiscal year. According to consensus estimates Apple’s revenue in the next fiscal year could rise 6.4%, but these estimates could turn out to be too conservative if we see an upgrade cycle with iPhone 16.

Apple’s capability to scale AI offerings without incurring huge capital expenditures is a clear benefit. The iPhone 16 should benefit from an upgrade cycle potential. The new iPhone 16, with its new class of capabilities, will drive demand, especially after two years of modest iPhone growth. Early adopters are likely to support demand due to the iPhone 16’s advancements in generative AI applications, touch-based apps, 5G connectivity, and enhanced cameras.

The iPhone 16 is likely to feature primarily in-house developed generative AI applications, with third-party developed apps anticipated to appear in the iPhone 17, likely sparking another upgrade cycle. Additionally, Apple is expected to integrate generative AI functionality into its Macs, iPads, and even Watches, progressively enhancing these devices’ capabilities and encouraging more users to upgrade.

Source: TradingView

Technical Analysis

After two tepid years of iPhone growth and the share price broadly trading in a range, the announcement from the WWDC have pushed the price of Apple through its key resistance of $199.62. While the stock may appear overbought on a short-term basis after its strong run last week, it’s worth noticing that the share price performance has only just caught up pace with the broader market.

The technical breakout is a very encouraging sign and suggests that higher price levels are likely to unfold. The first potential upside price target based on the breakout is in the range between $230.00 and $235.00. However, in the short-term the stock is overbought and a pull back to unwind the overbought momentum conditions could unfold.

The Relative Strength Index (RSI) has moved firmly in the bull market range pointing to higher prices over the long-term. Given the long period of time the share price consolidated and the impulsive nature of the breakout, we are of the view that the primary up trend has only just started. Therefore, levels towards $250 appear easily achievable in the next 12 months.

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