Apple without AI looks more like Coca-Cola than a high-growth tech company

For two decades, no company has embodied the promise of the stock market more than Apple. Its transformation from a niche computer maker to the world’s most valuable company has made its stock a cornerstone of global investment portfolios.

But seemingly in the blink of an eye, Apple’s luster began to fade. Artificial intelligence is a hot topic in technology today, fueling growth for a company that has relied on selling its products and services to eager consumers around the world.

This puts Apple in a dilemma. The company’s revenue expansion has stalled, and the stock has lagged the Nasdaq 100 by about 16 percentage points as it started its biggest year since 2013. The company still generates a lot of revenue, but whether it can continue to grow at the pace investors expect is an open question. Apple executives say they have big plans for artificial intelligence, which bulls hope will help revive its sales expansion. But so far it’s difficult to assess its prospects.

All of which has investors wondering, what role would the stock play today if Apple’s AI dreams don’t come true?

“It’s become more of a value stock, a bit like Coca-Cola,” said Phil Blancato, CEO of Ladenburg Thalmann Asset Management and chief market strategist at Osaic. “All you want. Everything is going to give you a defensive profile and market rate returns for the foreseeable future until they get a new catalyst.”

In fact, Apple remains as reliable a money-making machine as ever. Looking for a shareholder-friendly cash flow powerhouse? How about a safe haven with a bulletproof balance sheet? It checks the boxes.

“If you’re a long-term investor who really likes solid, steady growth, like an annuity, with growing margins, improving profitability, a business that generates a lot of cash but still has a lot of runway for innovation, we think Apple is “This is a great place to be,” said Kevin Walkush, portfolio manager at Jensen Investment Management. “

But investors looking to tap into the next big growth market have turned their attention to artificial intelligence. Nvidia is taking over from Apple as the tech giant as demand for chips designed to support large language models seems insatiable.

Valuation wiped

Apple’s stock price has fallen by more than 10% this year, its market value has evaporated by about $330 billion, and it has ceded its status as the world’s most valuable company to Microsoft, which has incorporated ChatGPT into its Office software and other products to start driving revenue growth. Microsoft’s current market capitalization is nearly $3.1 trillion, while Apple’s market capitalization is $2.7 trillion. Nvidia, whose revenue and profits soared in the arms race for artificial intelligence computing power, followed suit at $2.2 trillion.

The problem isn’t that Apple suddenly stopped growing, that’s been happening for a while — its revenue shrank every quarter of its last fiscal year, even as the stock hit new highs. The problem is that the company has nothing to show for its AI efforts at a time when iPhone sales are sluggish and the company faces growing regulatory threats.

“We are experiencing an incredible wave of innovation,” said Mark Lehmann, CEO of Citizen JMP Securities. “The market tells you that Apple has a lot to prove, but so far they haven’t shown much.”

Apple is known to reveal little about its plans to incorporate artificial intelligence services into its products. Chief Executive Tim Cook has promised that Apple will “break new ground” in artificial intelligence this year, and market professionals expect big announcements at the company’s annual software developers conference in a few months. However, many investors are losing patience and turning to stocks with a clearer path in artificial intelligence.

At the heart of Apple’s troubles is the disappearance of revenue growth, and it’s unclear what, if anything, is exacerbating that. The Vision Pro headphones, the company’s first major new product category in nearly a decade, are not expected to contribute significantly to growth in the coming years. Apple recently ended its long-running effort to build an electric car. Meanwhile, iPhone revenue has stagnated and sales have declined in China amid a weakening economy and increased competition.

regulatory pressure

In addition, Apple is also facing increasing pressure from regulatory agencies. Earlier this month, the European Union launched an investigation into allegations that Apple blocked music streaming rivals from its platform and fined it about $2 billion. In the United States, after five years of efforts, the Justice Department appears set to file an antitrust lawsuit accusing Apple of imposing software and hardware restrictions on iPhones and iPads to hinder rival competition.

Data compiled by Bloomberg show sales fell 3% in fiscal 2023 and are expected to grow just 2% this year. This compares to 2021 revenue growth of 33%. Meanwhile, Nvidia’s sales are expected to grow 79% this fiscal year and Microsoft’s will grow 15%.

Over the past few years, Apple’s valuation has been comparable to Microsoft’s. Two years ago, when tech stocks were getting hammered, their stock prices far outperformed their peers. But that is no longer the case. Apple is pricing at about 25 times projected profits for the next 12 months, down from about 30 times last summer. That’s similar to Walmart Inc.’s valuation. Meanwhile, Microsoft’s shares trade at 32 times and Nvidia’s shares trade at 35 times.

That said, Microsoft’s record-high trading price might actually be a good example of Apple’s long-term potential. When Satya Nadella took over the company in 2014, it was a software maker with a 20th-century mindset and a depressed stock price. Now it’s everywhere, from the cloud to artificial intelligence, and its stock is soaring.

“Everyone has to reinvent themselves, and that just goes to show you how fast the technological revolution can happen,” said Citizens JMP’s Lyman. “Microsoft finally got their act together, but it took them 15 years to figure it out.”

Of course, despite this year’s dismal results, it’s easy to think Apple stock is poised for a rebound, and it’s too early to rule it out of the AI ​​race. The company has more than $170 billion in cash on its balance sheet and expects net profit to top $100 billion this year. This gives Apple unparalleled resources to expand into new markets while still returning cash to shareholders through dividends and stock buybacks.

“It’s hard not to draw comparisons to what’s the hottest thing right now,” said Janssen Investment Management’s Wakush. “If you take AI and sensationalism out of the picture now, will people view Apple differently? I think they will.”