How Apple Became an AI Stock

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Good morning. I hate writing about politics, and doubt that there is much geopolitical alpha in the markets, which are very good at discounting political information. But between what we learned about Biden's mental capacity last week, and what we learned about France's political transformation yesterday, I may have to write something about the implications of politics for markets before too long. Is. Send me a good angle:

Apple gets AI halo.

Since May 1, Apple shares have risen 24 percent, adding $600 billion in market value. Only Nvidia has increased in value more. Microsoft is a distant third. What seems to have happened is that Apple has become – perhaps in reality, or perhaps only in appearance – an AI stock.

Over the past two months, expectations for Apple's financial results have risen, but not for the near or even medium term. Projections for this year or 2025 are essentially unchanged, either in terms of revenue or earnings. You have to look at 2026 and 2027 to see the change in analyst expectations. For 2027, earnings and earnings growth expectations have increased by four and eight percentage points, respectively, since the beginning of May. that's a lot. The chart below shows revenue growth for Apple in 2022 and 2023, and growth expectations for the coming years, as they were two months ago and as they are today:

I'm not sure how seriously analysts' estimates for results in three years' time should be taken, anything other than a hand-waving expression of excitement or vice versa. Note, however, that even a large jump in year-over-year estimates is not enough to explain this move in Apple's price. Estimates have increased the value at the top of the increase. Expectations are high by all accounts, as evidenced by the fact that Apple's valuation premium to the S&P 500 has moved back above its recent range (even as the S&P's own valuation has steadily increased).

What events in the past two months might explain the changes in prices, estimates, and values? There are two candidates. There was a first-quarter earnings report that came out on May 2, which was better than expected, and the share price rallied after that. Revenue fell in the first quarter, but not as badly as feared. Dividend and share buyback announcements were more than expected. Solid financial news, but not much else.

Then there's the June 10 announcement of a partnership with OpenAI, which will support a new feature, “Apple Intelligence,” on iPhones and other devices. Attaching the Apple name to the company that developed ChatGPT, the first of the truly impressive common language models, is a big deal. Apple Intelligence's announced capabilities, as we know LLMs can already do, are no different. proofreading and editing tools; Emoji customization, image building, improved language interpretation for the Siri digital assistant, all with the usual Apple-y promises about privacy. There doesn't seem to be anything that can drive the device upgrade cycle between users.

Perhaps all of this was to show that Apple is in the game, integrating AI technology into its devices so that it's ready when the killer app appears. Apple's strength, after all, is perfecting new technologies rather than advancing them. It makes sense that when and if user applications for AI blossom, Apple could create some very useful versions of them, given its strength in user interfaces and its huge captive user network.

Apple is on par with Meta, Microsoft and Alphabet in this regard. All three are bound by the assumption that the economic strength and market position of their legacy businesses guarantees them a strong position in what is essentially a new and potentially very different industry, AI.

We've seen evidence that AI can do impressive things in information processing. From a profitability perspective, however, we've seen huge chip sales for Nvidia (and some others) and a bunch of companies that have seen their prices improve as they wear the AI ​​halo. We don't know what AI-based businesses — outside of businesses that provide the computing power that AI needs — will look like. So the fact that simply throwing your hat in the ring could add hundreds of billions of dollars to Apple's value is a pretty good indicator that we're in a bubble.

There are two types of bubbles. A speculative frenzy around an idea or technology whose value is fundamentally overstated. Tulips and, I would argue, cryptocurrency fit into this category. Then there are bubbles that form around very valuable things, before the financial and competitive structure around those things is understood. The railroad, telecom, and bubbles fit into the latter category. AI does too.

A good read

CLOs are running out of things to buy.

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