Artificial Intelligence

How Apple (AAPL) Could Dial Into an 'AiPhone'

Close-up of Apple iPhones on display
Credit: Edgar Su / Reuters - stock.adobe.com

Apple (AAPL) shares have not performed as well so far in 2024 as investors would like. The stock has fallen some 7% year to date, trailing the 8% rise in S&P 500 index. And if you’ve bought and only held Apple stock over the past six months, the shares have fallen 5% during that span, while the S&P 500 index has risen almost 14%.

But there are plenty of reason to be bullish about Apple’s growth prospects, including the company's potential pivot into generative AI as Apple hopes to catch AI leaders like Nvidia (NVDA), Microsoft (MSFT), among others. Toni Sacconaghi, analyst at investment firm Bernstein, thinks Apple's catchup ability within the realm of AI is possible. Doing so amounts to the tech giant taking an incremental approach to pivot its flagship product, the iPhone, to an "AiPhone."

Sacconaghi posited that Apple may use use AI for similar tasks, but it may go a bit further, given the company's ability to integrate software and hardware. "We expect potential AI capabilities that are also largely consistent with existing products, including advanced image and video capture/editing tools, translation and transcription, enhanced messaging support, enhanced Siri and greater automation in Music, among others," Sacconaghi wrote in a note to clients.

Sacconaghi has a Market Perform rating on Apple stock and $195 price target. He suggested Apple may included other AI-specific features by leveraging its next-generation chip which is expected to be 3 nanometer A18. Despite Sacconaghi’s bullish notes, the stock has not reacted favorably, suggesting that investors believe Apple lags too far behind Microsoft and Nvidia. Sacconaghi, however, reminded investors that this isn't the first time Apple has thought to be “late.”

"We note that Apple was late relative to peers to introduce large screens (6/6+ cycle), OLED (iPhone X) and 5G, but each triggered meaningful upgrade cycles for Apple," Sacconaghi said. The point there being, Apple doesn’t prioritize being first or being early, as much as it prioritizes being “better.” Now, if Apple were to indeed launch an AiPhone, what would that equate to in terms of revenue?

"Our analysis suggests that every 100 [basis point] change in the upgrade rate for iPhone would represent an incremental ~8M phones sold, or ~$7B of iPhone revenue, adding [roughly 300 to 400 basis points] to FY25 iPhone revenue, and 100-200 [basis points] to overall revenue growth," Sacconaghi added. The thought here is that Apple could potentially justifiably raise prices on the iPhone 16 if the device boasts more of the AI features.

To be sure, these are all assumptions and speculations which Apple management has not directly endorsed. However, Apple CEO Tim Cook hasn’t been shy about expressing his interest in generative AI. In the company’s most recent earnings call with analysts, Cook said, "In terms of generative AI ... we have a lot of work going on internally as I've alluded to before.” Adding the company has "some things that we are incredibly excited about that we'll be talking about later this year.”

Cook’s comments can be taken in any number of ways. While they are not directly confirming what Sacconaghi is proposing, the comments do, however, suggest Apple is making (or will be making) considerably more AI-related investments to bolster its competitive position within the marketplace. Whether these investments are in hardware such as an AiPhone or in software with its iOS, there is reason for investors to be more excited and enthusiastic about the company’s direction.

Meanwhile, while the stock may not have shown much movement, the company is deploying capital to shareholders via its extensive share buyback program which reduces the shares outstanding by roughly 3% annually, thus driving EPS growth. And I think that is enough reason for investors to stay dialed in, whether the AiPhone arrives or not.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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