Will New AI Integration Help Apple Stock Pop?

The personal electronics giant Apple (AAPL -0.29%) jumps off the page as a no-brainer winner in artificial intelligence (AI). There are many ways to integrate AI into iPhones, watches and other Apple products. Wall Street has high expectations for the new iPhone 16, Apple’s first iPhone released with AI capabilities.

Renowned technology stock analyst Dan Ives recently estimated that 300 million iPhones worldwide are more than four years old, setting the stage for a super-cyclea time when many consumers are upgrading their devices, accelerating Apple’s growth.

But is the stock ready to see the pop investors are hoping for?

Read this before you buy Apple stock for its AI hype.

Is Apple Intelligence overhyped?

Apple’s AI software, Apple Intelligence, will integrate large language models into iOS, creating new skills and enhancing existing features, including enhanced Siri functionality. It faces pressure to deliver a wave of iPhone upgrades. However, there are signs that it may come up short.

First, Apple Intelligence will only be available to a limited customer base on day one, with the beta version set to launch next month. Additional features, including non-English versions, will be released months after that. In other words, Apple Intelligence will hit the market in a slow trickle rather than an exciting burst.

A research firm surveyed existing iPhone users this summer about their plans to upgrade. According to the results, 73% of respondents plan to upgrade primarily because their phones are outdated or damaged — only 18% plan to upgrade because of new features. The June survey precedes the iPhone 16 launch in September. However, Apple unveiled Apple Intelligence in early June, and AI had already found its way into Android smartphones by then, so it would seem that AI would have been on people’s minds at the time.

So far, early pre-order data is mixed. An industry analyst recently reported that early pre-orders for the standard iPhone 16 and iPhone 16 Plus are up 10% and 48%, respectively, over last year’s pre-order levels. However, the top-of-the-line Pro and Pro Max versions dropped by 16% and 27%.

At least so far, it’s hard to call this the game-changing supercycle that Apple is hoping for.

Apple’s stock sets the price for AI success

If the iPhone 16 is short, the stock price could become an issue. You can see below that Apple has a long history of “bubbly” growth: a supercycle takes Apple to new heights, followed by stagnation. Apple’s latest boost came with the iPhone 12, the first with 5G network technology.

Since then, you can see that Apple’s sales have increased. However, the stock’s valuation has surged higher, possibly on the assumption that AI will create another supercycle, pushing Apple to the next level.

AAPL Revenue (TTM) data by YCharts.

It’s not easy to grow revenue when you’re a company big enough to generate nearly $400 billion in revenue. Apple is famous for its massive share buyback programs, but earnings growth from buybacks likely won’t be enough to support a price-to-earnings (P/E) ratio of nearly 35. Apple needs to surpass $400 billion in sales yearly.

Should you buy Apple stock today?

Investors should consider both sides of the coin before buying stocks today.

Let’s say Apple surpasses $400 billion in annual revenue and the iPhone 16 is a hit. This is fantastic! The problem is that the stock has already priced in that growth. Earnings could falter more, and Apple’s valuation could only fall to a reasonable level. It’s hard to imagine enough earnings growth to make the stock cheap. Even if you double the earnings per share, Apple’s P/E ratio is still over 17, roughly where it was trading before the pandemic.

On the other hand, if Wall Street deems Apple’s AI iPhone cycle to be less than exceptional, the stock could experience a sharp decline. If the needle on earnings doesn’t move significantly, Apple’s stock price would have to fall dramatically to recalibrate the P/E ratio to a more reasonable level for a large company facing growth challenges.

Of course, Apple is one of the most powerful brands and companies in the world, but that doesn’t guarantee that the stock will treat you well. Apple stock is in a precarious position, which should give investors pause before jumping aboard the AI ​​hype train.