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How Apple Became an AI Stock
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Good morning. I don’t like writing about politics, and I doubt there’s much geopolitical alpha in markets, which are very good at discounting political information. But between what we learned last week about Biden’s mental capacity and what we learned about France’s political transformation yesterday, I may have to write something about the repercussions of politics for markets soon. Send me a good angle: robert.armstrong@ft.com
Apple gains an AI halo
Since May 1, Apple’s stock has risen 24 percent, adding more than $600 billion in market value. Only Nvidia has gained more in value; Microsoft is a distant third. What it seems is that Apple has become — perhaps in reality, or perhaps just in appearance — an AI stock.
Over the past two months, expectations for Apple’s financial results have risen, but expectations for the near or even medium term have not. There has been essentially no change in estimates for this year or 2025, either for revenue or earnings. You have to look at 2026 and 2027 to see a change in analyst expectations. For 2027, expectations for revenue and earnings growth have increased by four and eight percentage points, respectively, since the beginning of May. That’s a lot. The chart below shows Apple’s 2022 and 2023 earnings growth, and growth expectations for the coming years, both as they were two months ago and as they are today:
I’m not sure how seriously to take analyst estimates for three-year earnings, as anything other than expressions of enthusiasm or the opposite. Note, however, that even the big jump in year-end estimates isn’t enough to explain Apple’s price action. There’s been a substantial increase in valuation in addition to the increase in estimates. Expectations are high across the board, as reflected in the fact that Apple’s valuation premium to the S&P 500 has climbed back to the top of its recent range (even as the S&P’s own valuation has been steadily rising).
What events in the past two months might explain the changes in prices, estimates, and valuations? There are two candidates. One was the first-quarter earnings report that came out on May 2, which was better than expected and was followed by a rise in the stock price. Revenue fell in the first quarter, but not as much as feared. Dividend and share buyback announcements were larger than expected. Solid financial news, but not much more.
Then there is the June 10 announcement of a partnership with OpenAI, which will power a new feature, “Apple Intelligence,” on iPhones and other devices. Attaching Apple’s name to the company that produced ChatGPT, the first of the truly impressive general-purpose language models, is a big deal. The announced capabilities of Apple Intelligence, distinct from what we know LLMs can already do, are not. Review and editing tools; emoji customization; image construction; improved language interpretation for the digital assistant Siri—all with Apple’s usual promises about privacy. Nothing here seems likely to drive a device upgrade cycle among consumers.
Maybe all that mattered was to show that Apple is in the game, integrating AI technology into its devices so that it’s ready when that killer app comes along. Apple’s strength, after all, is perfecting rather than pioneering new technologies. It makes sense that when and if consumer applications for AI flourish, Apple could make some of the most useful versions of them, given its strength in user interfaces and its huge network of captive users.
Apple parallels Meta, Microsoft, and Alphabet in this respect. All three are linked by the assumption that the economic power and market position of their legacy businesses gives them a strong position in what is fundamentally a new and potentially very different industry: AI.
We’ve seen evidence that AI can do some pretty impressive things in information processing. From a profit perspective, though, all we’ve seen are huge chip sales for Nvidia (and a few others to a lesser extent) and a bunch of companies that have seen their valuations improve by virtue of using an AI halo. We don’t know what AI-based businesses will look like — outside of the business that provides the computing power that AI requires. So the fact that just throwing your hat in the ring could add hundreds of billions of dollars to Apple’s value is a pretty good indication that we’re in a bubble.
There are two types of bubbles. One is a speculative frenzy around an idea or technology whose value is fundamentally overstated. Tulips and, I would argue, cryptocurrency fall into this category. Then there are bubbles that form around things that are very valuable, before the financial and competitive structure around those things is understood. The railroad, telecom, and dot-com bubbles fall into this last category. AI does too.
A good read
CLOs are running out things to buy.
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