Apple's stock is seeing its best day in 1.5 years, but an existential question remains

By Emily Bary

One analyst calls out 'very weak' talk on generative AI

Investors are breathing a sigh of relief on Friday after Apple Inc. disclosed that its iPhone business is showing surprise growth in China, but it left another topic of raging investor debate unsettled.

While Apple's (AAPL) overall revenue fell in Greater China during the March quarter, the decline wasn't as steep as expected, and Chief Executive Tim Cook shared that the company actually saw growth for its iPhone segment in mainland China. That's one bit of upbeat commentary helping to drive the stock up 6.2% in Friday morning action.

That puts Apple's stock on track for its largest single-day percentage gain since Nov. 10, 2022, when it rose 8.9%, according to Dow Jones Market Data.

See more: Everything to know about Apple's earnings

"Everyone was nervous given China, but the 'Cupertino Colossus' came through," Melius Research analyst Ben Reitzes wrote.

Sentiment has been fairly negative on Apple shares lately - they were down 10% on the year through Thursday's close - and China's not the only reason why. Now that the company has helped soothe the China concerns, it's time for Apple to move on to the next big area of investor debate: its artificial-intelligence positioning.

Despite numerous AI-related questions on Apple's earnings call, management seems intent on waiting to say anything major on the topic. The company is expected to make an announcement about generative AI at its WWDC developer event in June.

Opinion: Forget AI. Apple's plan to restore confidence is a $110 billion stock buyback.

But analysts are split on what generative AI will actually do for Apple.

Some, like Reitzes, are highly positive. He likens the current period to 2014, when Apple was late to launch larger-screen phones.

"When you were about to give up on Apple in 2013, the growth turned around by 2014 and you saw the power of the brand and customer loyalty in a massive upgrade cycle," he wrote, noting that shares doubled from July 2013 to January 2015.

"This time around, you have the world's most trusted brand that makes a device you can't live without about to have its most important developers conference since the iPhone launch in 2007," he added. "The AI initiative that will be unveiled should bring new services and likely compel you to upgrade all your gear in order to use it over the next 3 years. Stay the course."

Reitzes rates the stock a buy with a $227 target price.

Martin Yang of Oppenheimer was upbeat as well. "With the upcoming adoption of on-device AI across Apple's family of devices, we look forward to stronger refresh cycle," he wrote, while keeping an outperform rating and $200 target price.

But others flagged some areas of concern. Needham's Laura Martin has a buy rating and $220 price target on Apple's stock, but she deemed Apple's generative AI talk "very weak."

"Investors we talk to believe that [generative AI] is the next technology disruption, and [Apple] continues to focus its commentary on the last disruption, which was mobile," she wrote.

The fear on Wall Street is that internet players like Amazon.com Inc., Alphabet Inc. and Microsoft Corp. could sport more upside due to their generative AI efforts.

Read: Apple vs. the world: Can the tech giant survive a global regulatory onslaught?

Those companies all talked up ramping capital expenditures. The fact that Apple didn't "suggests it isn't investing in [generative AI] fast enough," Martin added.

Barton Crockett of Rosenblatt Securities also took a more measured view.

"Apple's stock is best when trafficking in disruptive innovation; with Vision Pro super niche, cars abandoned, the only real investable opportunity is gen AI, where Apple plans announcements for its WWDC in June, and can leverage its skill with hardware/ software integration and proprietary neural chips and privacy," he wrote.

Crockett's survey work suggests AI could be a sales driver for Apple, "but the risk for Apple is that its Gen AI efforts are not appealing enough; or are seen as too derivative." In other words, Apple could wind up a laggard, at least in the eyes of investors.

He lifted his price target on the stock to $196 from $189, while keeping a neutral rating.

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-03-24 0950ET

Copyright (c) 2024 Dow Jones & Company, Inc.