July 21, 2024

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Apple’s AI rally puts valuation at risk of outpacing reality

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Apple Inc.’s record-breaking rally has invited skepticism as to whether its artificial intelligence strategy justifies the stock’s valuation.

The shares surged to a fresh all-time high last week, briefly taking Apple back above Microsoft Corp. as the world’s most valuable company after it unveiled new AI features that investors hope will spur a massive upgrade cycle among users.

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That’s pushed the valuation to around 30 times forward earnings, a level that the stock has struggled to sustain in the past. While Apple’s plans were cheered by investors seeking faster revenue growth and higher returns on capital at the firm, questions remain as to when exactly that boost will arrive.

“I hope the market is right, but so far we haven’t seen enough to be sure,” said David Daglio, who manages US$7.9 billion as chief investment officer at TwinFocus Capital Partners LLC. “I wouldn’t put new money to work here. The risk-reward is negative at best.”

The timing of when Apple’s AI strategy will deliver a meaningful boost to revenue is key. The rollout of new AI offerings may be slower than investors want, stretching into 2025. The stock rose as much as 1.1 per cent Friday morning.

Wall Street expects Apple’s revenue growth to tick back up in the second half of 2024, but end the year at just one per cent before accelerating to seven per cent in 2025. In the iPhone segment, revenue is forecast to slip in the last two quarters of 2024, when compared to the same period a year earlier.

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Climbing valuations are top of mind for investors considering how to play the next leg of the AI rally. Other than Apple, gains to record highs in shares of Microsoft and Nvidia Corp. have pushed the broader market higher, but have also pushed up price-to-earnings ratios for the stocks. Microsoft trades at about 34 times forward earnings, while Nvidia trades at 43 times. The Nasdaq 100 index trades at about 27 times forward earnings.

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Bloomberg News

2024-06-21 10:43:01

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