Apple's Stock is Up 25% Since Its April Low. Here’s How It Can Gain Another 25%.

Apple Inc. is making a significant comeback from its perceived lag in artificial intelligence, with its shares rising 26% from their April lows, partly driven by optimism surrounding the latest AI announcements at the Worldwide Developers Conference (WWDC).

‍

Melius Research analyst Ben Reitzes believes Apple's AI-driven gains are far from over. In a Monday report, Reitzes raised his price target for Apple stock from $227 to $260, suggesting a potential 25% upside from last Friday’s close.

‍

“While we like the AI story right now, we still think it ‘boils’ gradually as features are released, hitting its peak stride” in the next two fiscal years, Reitzes wrote.

‍

One of the most appealing aspects of Apple's AI strategy is that nearly everyone will need a new phone to access the forthcoming AI features, which are limited to iPhone 15 Pro models or newer. Moreover, Apple has showcased these AI functions in ways that are “compelling to the layman,” encouraging people to upgrade to try them out. Many people are still using older iPhones purchased during the pandemic, and unlike other electronics, smartphones tend to wear out through heavy use.

‍

“We are fans of embracing the obvious, even from here, since the world’s most loyal install base has to upgrade to get AI — and we see [earnings-per-share] power going over $9,” Reitzes wrote. “While we have reflected several times on a potential surge akin to the 2014/2015 ‘big screen’ cycle, we really don’t recall a precedent like this — with so many new features only available in new phones.”

‍

Reitzes anticipates that Apple’s iPhone business will see significant acceleration starting in the December quarter, and he believes the consensus view underestimates the company's potential. For example, current expectations suggest 4% iPhone revenue growth in fiscal 2025 and 2% growth in fiscal 2026. In contrast, Reitzes forecasts 7% and 10% growth, respectively.

‍

“We are not overly concerned about pricing being an obstacle since many consumers in developed markets pay by the month,” he wrote.

‍

Reitzes also sees potential for AI to boost other Apple products and services. For instance, AI could enhance the value of people’s data and lead to new video-generation features, which could increase the use of iCloud storage.

‍

Apple's approach to AI has garnered attention, and its focus on integrating AI features into new iPhones is expected to drive upgrades. This strategy is different from previous product cycles, with AI-specific features available only on the latest models. This creates a strong incentive for users to upgrade, especially given the wear and tear on older phones from heavy use during the pandemic.

‍

Reitzes is optimistic about Apple's financial performance, predicting earnings-per-share to exceed $9, supported by the anticipated surge in iPhone upgrades. He views this AI-driven upgrade cycle as unprecedented, with numerous new features available exclusively on new phones, creating a unique opportunity for growth.

‍

Apple's AI capabilities are also expected to positively impact other areas of its business. Enhanced data value and potential video-generation features could drive increased usage of Apple’s iCloud storage service, further boosting revenue.

‍

Overall, Apple's strategic focus on AI and the requirement for new hardware to access these features positions the company for continued growth. Reitzes' bullish outlook reflects confidence in Apple’s ability to capitalize on its loyal customer base and drive significant upgrades, leading to strong financial performance in the coming years.

‍