Tech stocks have rebounded in 2023 thanks to multiple favorable factors such as slowing inflation and the growing popularity of artificial intelligence (AI), which explains why tech stocks Nasdaq 100 Technology Sector The index jumped an impressive 66% towards the end of the year.
Seven mega-cap technology companies, collectively known as “Magnificent Seven“, have been one of the drivers of the rise in technology stocks this year. These Magnificent Seven stocks include Apple (NASDAQ:AAPL), Amazon, Alphabet, Metaplatforms, Microsoft, NvidiaAnd You’re here. There is, however, one stock in this group that has not taken off like the others: Apple.
Even though Apple shares are up 49% in 2023, they have underperformed the Nasdaq 100. This may be because the company’s growth hasn’t been strong lately. Apple’s revenue for fiscal 2023, which ended September 30, fell nearly 3% year over year to $383 billion. Net income growth almost stagnated, with adjusted earnings up just two cents year-over-year to $6.13 per share.
However, analysts expect a turnaround for Apple this year. The company is expected to return to revenue growth in fiscal 2024 and earnings growth is expected to accelerate. AI could play a key role in this turnaround. Let’s see why this may be the case.
AI could revive demand for Apple products
Apple struggled to grow its revenue and profits last fiscal year due to a sharp decline in personal computer (PC) sales and weak demand for smartphones. IDC estimates that PC sales are on track to fall 13.8% in 2023. Meanwhile, Counterpoint Research predicts a 5% decline in smartphone sales this year.
Given that MacBooks and iPhones together generated 60% of Apple’s revenue for fiscal 2023, it’s not surprising why the company’s performance has been lackluster. The good news is that the smartphone and PC markets are expected to recover. Market research firm Canalys forecasts an 8% increase in PC sales in 2024. At the same time, the company expects smartphone sales to grow by 4%.
A recovery in these markets should have a positive impact on Apple’s performance. Consensus estimates call for Apple’s revenue to rise 3.5% in the current fiscal year to $397 billion. Its earnings are expected to rise 7% to $6.57 per share. Although these figures are not as spectacular as some of Magnificent Seven’s other titles are up to par, investors would do well to focus on the bigger picture, as the adoption of AI in smartphones and PCs could lead to stronger growth for Apple.
For example, sales of AI-enabled PCs could grow at a compound annual rate of 50% through 2030, according to Counterpoint. This type of growth could lead to increased demand for Apple’s MacBook powered by the M3 Max processor, capable of running AI workloads such as Adobe Lightroom’s AI Denoise feature with its powerful specs.
Additionally, a survey by app subscription service Setapp found that 42% of Mac users use AI apps on their MacBooks daily. As the number of AI applications that can run locally on PCs rather than in the cloud increases in the future, the number of Mac users using AI should ideally increase. Additionally, the advent of PCs capable of running AI applications will likely encourage existing users to upgrade.
Meanwhile, a recent research paper from Apple suggests that the company is looking for ways to make large language models work on smartphones. This would likely open up another big opportunity for Apple to increase sales in the long term, as AI-enabled smartphones are expected to gain critical mass starting next year. Counterpoint predicts that 100 million AI smartphones could be sold in 2024.
Although this represents only a small percentage of the 1.17 billion smartphones expected to ship next year, Counterpoint expects AI-based smartphones to account for 40% of new devices sold in 2027. It seems Apple doesn’t want to miss this bus, given that it’s working on ways to integrate AI capabilities into its smartphones and tablets, and supply chain rumors suggest the tech giant technology could launch its next iPhone with built-in AI features.
Such a device could help Apple capitalize on its position as the second-largest smartphone maker, with a share of nearly 18 percent, and boost iPhone sales. Apple could benefit from a much-needed boost since the iPhone is its largest product line and generated 52% of its revenue in the previous fiscal year.
Is the stock still a buy?
We saw that Apple stock posted decent gains in 2023 despite poor financial performance. As a result, investors may wonder whether the stock is worth buying, especially since the 39 analysts covering Apple have a median price target of $200. This represents a limited increase of only 3% from current levels.
Apple currently trades at 8 times sales and 31 times earnings. These multiples are rich given the financial performance of the company. After all, Apple’s earnings multiple is almost in line with the Nasdaq 100’s trailing price-to-earnings ratio of 30, suggesting the stock is not a value play.
Apple can justify its valuation by seeing stronger growth in 2024, and AI could help it deliver on that front. So investors with an appetite for risk may consider betting on an Apple turnaround and start accumulating shares before a potential AI-fueled rally sends them soaring in the new year.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Adobe, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
Why artificial intelligence (AI) could be a game changer for this “Magnificent Seven” title was originally published by The Motley Fool