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Apple's Record-Breaking Rally and AI Strategy Spark Skepticism
Apple Inc.'s recent surge to an all-time high has raised questions about the sustainability of its stock valuation, driven by its latest artificial intelligence (AI) features. During this rally, Apple briefly reclaimed its status as the world's most valuable company, surpassing Microsoft Corp. Investors are optimistic that these new AI offerings might drive a massive upgrade cycle among users. This enthusiasm has pushed Apple's valuation to approximately 30 times its forward earnings—a level it has historically struggled to maintain.
Despite investor excitement, the timing of the revenue boost from Apple's AI strategy remains uncertain. While some hope for faster revenue growth and higher returns on capital, others are cautious. David Daglio, Chief Investment Officer at TwinFocus Capital Partners LLC, expressed skepticism, stating that the risk-reward ratio is currently negative, advising against new investments in Apple at this time.
Apple's new AI features may take longer to significantly impact revenue, potentially stretching into 2025. Wall Street forecasts a modest revenue growth of 1% by the end of 2024, with a more significant increase to 7% expected in 2025. However, the iPhone segment is predicted to see a dip in revenue during the latter half of 2024 compared to the same period the previous year.
The broader market is also experiencing upward momentum with gains from Microsoft and Nvidia Corp. contributing to the rally. Microsoft is trading at about 34 times forward earnings, and Nvidia at 43 times, compared to the Nasdaq 100 index's 27 times forward earnings. This has sparked debates among investors on future strategies, especially considering Apple's high valuation.
Analysts at JPMorgan, led by Samik Chatterjee, remain optimistic, recently raising their price target for Apple to $245 from $225. They believe new AI features could trigger an iPhone upgrade cycle and bolster earnings. On the other hand, Nancy Tengler, CEO at Laffer Tengler Investments Inc., has removed Apple from her best ideas list due to valuation concerns, favoring companies like Microsoft, Amazon, Oracle, and Broadcom that offer better growth visibility.
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Meanwhile, Huawei Technologies Co. is nearing a milestone of one billion active consumer devices, challenging Apple in the critical Chinese market. SoftBank Group Corp.'s founder Masayoshi Son is once again making headlines with ambitious plans for artificial super-intelligence. In another development, Ant Group Co. contemplates selling its stake in Baihang Credit Co. as it awaits a license approval for a similar entity.
In legal news, a UK court ruled that Apple Inc. unfairly dismissed an employee for racist comments tied to a toxic workplace culture at a London store. Moreover, a specialized investment firm is poised to benefit from two UK take-private deals and anticipates more offers targeting London's undervalued assets.
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Upcoming financial disclosures include reports from FactSet and Yiren Digital, due for release in the premarket session on Friday.
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