MoffettNathanson Initiates Apple Coverage with Neutral Rating, Citing AI Challenges and Valuation Concerns

Apple shares initiated coverage with neutral rating By Investing.com

On Monday, MoffettNathanson initiated coverage on Apple Inc. (NASDAQ:AAPL) with a neutral rating, setting a price target of $211. The firm presented a comprehensive analysis of Apple's artificial intelligence (AI) strategy, comparing it to the previous 5G upgrade cycle. They highlighted several challenges Apple may face in replicating the success of the 5G cycle, particularly in international markets due to regulatory and geopolitical hurdles. The report indicated that Apple's current valuation is significantly higher than it was during the 5G cycle, which could be a concern given the current environment of higher interest rates. This situation demands even greater growth rates for Apple to justify a similar market multiple. MoffettNathanson also pointed out the potential risks from ongoing antitrust litigation against Google (NASDAQ:GOOGL), which could impact the revenue Apple receives for making Google the default search engine on its devices. Despite some estimates being above consensus, the report suggested that the optimism reflected in Apple's share price might exceed what is indicated by sell-side consensus. The price target of $211 is based on a detailed discounted cash flow (DCF) analysis, assuming an 8.25% weighted average cost of capital (WACC) and a 4.5% terminal growth rate. MoffettNathanson's analysis raises concerns over whether the anticipated AI-driven iPhone upgrade cycle can achieve the heights of its 5G predecessor. The firm's neutral stance indicates a cautious approach to Apple's stock, acknowledging the company's strong market position while also considering the various challenges and risks it faces. The price target reflects a balanced view of Apple's future growth prospects and market valuation. Apple Inc. continues to dominate the AI PC market with a 60% share, according to Canalys. This comes amid the launch of the Epic Games Store on iOS within the European Union, a move Goldman Sachs (NYSE:GS) believes will have minimal impact on Apple's business. Meanwhile, TikTok is challenging the US Department of Justice over a forced sale, asserting that their user data and content recommendation algorithm are securely stored on U.S.-based Oracle (NYSE:ORCL) cloud servers.

Apple initiated with Neutral at MoffettNathanson on challenges to AI-driven iPhone cycle

MoffettNathanson began coverage of Apple (NASDAQ:AAPL) with a Neutral rating and $211 price target. The analysts compares the underpinnings of an AI-driven iPhone upgrade cycle to the conditions which prevailed at the start of the 5G upgrade cycle. There are several reasons why it will be challenging for an AI upgrade cycle to match that one, mainly outside the U.S., where a combination of regulatory hurdles and geopolitical considerations are likely to restrain Apple's AI roll-out and adoption. And yet, Apple's valuation today is already substantially more than it was for the 5G cycle. There is one more unflattering comparison to the 5G upgrade cycle of 2021/22. Interest rates are now higher, which means that growth rates will have to be significantly higher this time to warrant a similar multiple, according to the analysts. The analysts also highlighted the regulatory considerations that at this point should be viewed largely as risks rather than base-case forecasts, but which nevertheless simply cannot be ignored. A vital one among these is the risk posed by the U.S. government's antitrust litigation against Google, which poses a genuine threat to the enormous payments Google makes to Apple each year to be the default search engine on Apple devices. The analysts added that in many cases, their estimates are above consensus. But sell-side consensus does not fully capture the level of optimism that is built in Apple's current multiple. Apple's share price already embeds an aggressive terminal growth assumption which would seem to be significantly more generous than sell-side estimates imply.

Apple 'poised to win in AI' but that's already priced in says MoffettNathanson By Investing.com

Apple (NASDAQ:AAPL) is set to be a major player in the AI space, but according to MoffettNathanson, this potential is already reflected in its stock price. In a recent note to clients, the investment firm initiated coverage of Apple with a Neutral rating and a price target of $211 per share, highlighting that while Apple's AI strategy is strong, the market has already anticipated and priced in these developments. "Apple is poised to win in AI," MoffettNathanson noted, but cautioned that "that's exactly what's already priced in." The firm observed that despite earlier concerns about Apple's lag in AI, the market maintained confidence in the company's strategy, particularly following the World Wide Developers Conference (WWDC) where Apple confirmed much of its AI plans. "By the time of their June WWDC, the broad strokes of Apple's 'contextual awareness' AI strategy were already well-anticipated by the tech intelligentsia, and hence by the market as well," said the firm. MoffettNathanson emphasized that Apple's AI strategy leverages the trust of its over one billion users, especially regarding personal data like contacts and emails, which remain under Apple's exclusive control. The firm pointed out that Apple's strategy will likely drive an iPhone upgrade cycle, but the extent of this cycle is already reflected in the stock's current valuation. "Apple's new AI functionality would be presented in service of driving an iPhone upgrade cycle - Apple is, after all, still primarily a hardware provider - as capitalizing on resident inference capabilities would require at least 8 GB of RAM and a neural processor that phones older than the iPhone 15 Pro don't have," they explained. While Apple is expected to execute its AI strategy well, MoffettNathanson warned of potential risks, including regulatory challenges and the possibility that the upgrade cycle might not exceed expectations. The note concluded that AI will be the key factor determining Apple's future stock performance, but for now, everything is priced in.