What can drive Apple stock from here? Much more than the iPhone maker’s earnings next week
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Apple is set to report next week as megacap earnings kick into high gear. The quarterly results from the iPhone maker are always important, but they won’t determine what’s next for the stock. It’s a weird time for Apple, whose stock started 2024 as one of the most hated on Wall Street coming out of last year’s tech boom. It regained its luster ahead of better-than-feared earnings in May and last month’s artificial intelligence announcement. Apple has held up much better than its Big Tech counterparts in the painful market rotation that began July 11. Since then, the U.S. market cap leader, currently at more than $3.34 trillion, dropped roughly 6.5%. During that same stretch, fellow Club stocks Microsoft and Nvidia lost almost 7.4% and 14%, respectively. When Apple delivers fiscal third-quarter numbers after the closing bell on Aug. 1, analysts expect the iPhone maker to report a revenue increase of nearly 3% to $84.36 billion and an earnings-per-share (EPS) gain of more than 6% to $1.34. It’s the last quarter before the new iPhone is unveiled, which has seasonably been a slow time for upgrades. Apple usually introduces the next iteration of its flagship device in September. This year’s third-quarter dynamic, however, is being compounded by what we already learned at Apple’s annual Worldwide Developers Conference (WWDC) on June 10 — that the company’s new Apple Intelligence features will only be available on the iPhone 15 Pro model or better. That means buyers who might have made purchases in the past few months have another reason to wait and see what the new AI-enhanced iPhone has to offer. In the past, would-be buyers may have delayed their purchases to see what incremental upgrades the next model would bring. But this year, they know for a fact that the new iPhone will get them access to Apple Intelligence and then some, such as a better camera. That’s why the reported fiscal Q3 results from Apple, as important as they are, won’t be as important to investors as what management has to say about the current quarter — the fiscal fourth quarter ending in September. Any commentary on initial interest in Apple Intelligence will determine where shares go next. As of Wednesday, Apple stock gained about 13% year to date — just shy of the S & P 500 ‘s 2024 performance. AAPL YTD mountain Apple YTD Analysts at Barclays, who maintain a sell-equivalent on Apple due to an elevated valuation, believe that fiscal Q3 strength in services and MacBooks, thanks to an easy comp, will be offset by weakness in wearables. They think that iPhone and iPad sales will largely match expectations. In line with the Club’s view on what matters, Barclays said, “We think the Sep-Q guidance is the main event as investors care less on June-Q results due to the tail end of the IP15 cycle, but ultimately the reception of the iPhone 16 and AI features will dictate performance.” We have a wait-for-a-pullback 2 rating on Apple ahead of what’s expected to be the biggest iPhone upgrade cycle in years. Barclays analysts also looked at average hold times and the percentage of installed base upgrading for each iPhone generation starting with the iPhone 6. The average hold time was 2.4 years back when the iPhone 6 was launched. That cycle has now expanded to 5.6 years. The percentage of the installed base upgrading has fallen to a low of 18%, though units sold have largely held in around the 200 million range thanks to a growing installed base. That’s intriguing because, given the lengthened upgrade cycle, it’s a fortuitous time for Apple to release new cutting-edge features to prompt refreshes. Analysts on Wall Street are now trying to work into their models the degree to which hold times might shorten and the percentage of users getting new devices might increase. Despite its sell rating on Apple shares, Barclays highlighted supplier checks that point to a “slight uptick to iPhone builds, which translates to 52M iPhone unit shipment, above Street consensus of 49M units.” JPMorgan is far more bullish on what’s to come for Apple, reiterating its overweight buy rating and establishing a December 2025 price target of $265 per share, up from their December 2024 target of $245. Apple shares were trading around $218 late Wednesday. The analysts also believe the soon-to-be-announced quarter is likely going to be overshadowed by what Apple has to say about the September quarter and what it unveils with the iPhone 16. JPMorgan sees a higher mix of services revenue, increased upgrade volumes — even if the rate of upgrades remains low, thanks to the larger installed base — and the potential for Apple Intelligence to surprise consumers and “drive a secular increase in the replacement rate.” That differs from the Barclays analysts’ read on the situation. “We do not think the iPhone16/AI features will be enough to drive a meaningful enough upgrade cycle to justify the valuation,” Barclays analysts wrote. There’s no denying that Apple’s multiple is elevated. However, we tend to agree with JPMorgan that the direct benefits of iPhone upgrades, along with the more indirect benefits — such as the potential for AI to drive new service offerings and boost App Store downloads — provide support for the higher multiple. Bottom line We may still be in the early days of generative AI. But one thing becoming increasingly clear — more important even than the large language models themselves — is the data on which they are trained. So, by that logic, it’s the company with the most personalized data and the ability to apply that data to its models that can offer up the most personalized generative AI assistant. We are hard-pressed to find a company better positioned than Apple to offer up a personalized generative AI experience. After all, what knows more about our daily schedules, tastes in music, event plans, travels, geolocation, and family gatherings than our phones? The bull/bear debate on Apple depends on whether the benefits of Apple Intelligence are “priced in” at current levels. As “own it, don’t trade it” Apple bulls, we don’t think the implications and ripple effects of Apple’s AI efforts are being fully appreciated. Yes, the iPhone will be the greatest, most direct way for Apple to realize financial benefits from Apple Intelligence in the near term. The opportunity for Apple becomes much larger as the company works to integrate AI throughout its ecosystem of devices and services. That, in our view, represents a multiyear opportunity that will translate beyond hardware into high-margin services revenue growth, and therefore support the elevated multiple. (Jim Cramer’s Charitable Trust is long APPL, MSFT, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Apple CEO Tim Cook delivers remarks at the start of the Apple Worldwide Developers Conference (WWDC) on June 10, 2024 in Cupertino, California. Apple will announce plans to incorporate artificial intelligence (AI) into Apple software and hardware.
Justin Sullivan | Getty Images
Apple is set to report next week as megacap earnings kick into high gear. The quarterly results from the iPhone maker are always important, but they won’t determine what’s next for the stock.
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