Apple’s Upcoming iPhone Release A Double-Edged Sword

Apple’s upcoming iPhone release has significantly boosted its stock price, driven largely by expectations for new artificial intelligence features. This excitement reflects investor optimism about the potential impact of these innovations. However, this surge might be fragile, as historical trends suggest potential pitfalls. The tech industry often experiences volatility around new product launches, and unforeseen challenges could affect Apple’s stock performance.

Historical Trends and Stock Performance

Historically, Apple’s stock often performs poorly after iPhone releases. This occurs especially when expectations rise and the company’s price-to-earnings ratio increases. This leaves little room for error. Data from Bloomberg reveals that Apple shares have dropped on 12 of the 17 iPhone launch days. Over the past decade, September has been particularly challenging for Apple stock, with an average decline of 3.2%. This trend mirrors broader market behavior, as the S&P 500 Index and the Dow Jones Industrial Average also experience their steepest losses in September, according to the Stock Trader’s Almanac.

Anticipated Features and Market Sentiment

The new iPhone, set to be announced on September 9, is expected to include significant AI features. It will be available on September 20, with software updates arriving in October. Despite this, caution persists in the market. Denny Fish, managing the $7 billion Janus Henderson Global Technology and Innovation Fund, expressed concerns. He noted that the market might be overly optimistic, awaiting proof of Apple’s effective AI strategy.

Stock Valuation and Recent Performance

Since hitting a low in April, Apple shares have surged 39%, adding over $900 billion to its market cap. This surge contributed 22.6% of the Nasdaq 100 Index’s total gain during this period, according to Bloomberg. Currently, investors value the stock at 31 times projected earnings, which exceeds its 10-year average by more than 50%. Last month, the revenue multiple reached 8.8, the highest level since at least 2000.

AI Strategy and Investment Outlook

Optimism about Apple’s AI strategy has been a major driver of this rally. Citi has named Apple as its top AI pick for 2025, and Daniel Loeb’s Third Point LLC has invested, signaling that AI-driven demand could significantly enhance Apple’s revenue and earnings in the coming years. Despite this, Apple has faced growth challenges recently, with revenue declining in five of the past seven quarters. Analysts expect a modest 1.8% increase in the 2024 fiscal year, with growth accelerating to 7.9% in 2025. In contrast, analysts project the broader S&P 500 tech sector to grow revenue by 10.9% in 2024 and 12.7% in 2025.

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Upgrade Cycle and Market Expectations

Advancements in the iPhone have ironically slowed growth, as customers keep their phones longer due to improved cameras and batteries. This trend lowers the incentive to upgrade. Since the iPhone makes up nearly half of Apple’s revenue, Wall Street hopes new AI features will drive more upgrades. Over 40% of Apple’s 800 million smartphones are iPhone 12 or older, with 27% on iPhone 13 models. However, fewer than 10% of current users are expected to upgrade to the new AI software.

Risks and Future Outlook

Despite the excitement surrounding AI, a July BI survey suggested that AI alone might not drive significant upgrades for Apple. This potential shortfall could jeopardize Apple’s stock rally. MoffettNathanson recently started coverage with a neutral rating. They expressed skepticism about the upgrade cycle matching the 5G impact of 2021/22. Their concerns are heightened by the current interest-rate environment.

Short-Term Risks vs. Long-Term Growth

Despite these risks, optimism about AI’s long-term impact on Apple’s growth remains strong. Eric Johnston, chief equity and macro strategist at Cantor Fitzgerald, suggests that while there might be a short-term selloff around Apple’s upcoming iPhone release, the revenue and earnings generated over time could ultimately strengthen the stock. The upgrade cycle is expected to unfold over several years. This could solidify Apple’s position in the market.

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