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For two decades, no company better embodied the promise of the stock market than Apple<\/a> Inc. Its transformation from niche computer maker to the most valuable corporation on the planet made its shares a cornerstone of investment portfolios worldwide.<\/p>\n But in what seems like a blink of an eye, Apple\u2019s sheen is starting to fade. Artificial intelligence is the story in technology now, driving the growth that the company used to count on from selling its gadgets and services to eager consumers across the globe.<\/p>\n This has Apple in a quandary. Its revenue expansion is stagnating, and the stock is underperforming the Nasdaq<\/a> 100 by about 16 percentage points, the most to start a year since 2013. The company still generates massive revenues, but whether that can keep increasing at the pace investors have come to expect is an open question. Apple executives say they have big plans for AI, which bulls hope will help rejuvenate its sales expansion. But so far it\u2019s hard to gauge its prospects.<\/p>\n All of which has investors wondering, if Apple\u2019s AI dreams don\u2019t come to fruition, what is the role of the shares today?<\/p>\n \u201cIt\u2019s become more of a value stock, a bit like Coca-Cola<\/a>,\u201d said Phil Blancato, chief executive officer at Ladenburg Thalmann Asset Management and chief market strategist at Osaic. \u201cAll the things you want that\u2019s going to offer you a defensive profile and market rate returns for the foreseeable future until they have a new catalyst.\u201d<\/p>\n Apple remains the reliable money machine it\u2019s always been. It\u2019s certainly a shareholder-friendly cash flow juggernaut, and a safe haven with a bulletproof balance sheet.\u00a0<\/p>\n \u201cIf you\u2019re a long-term investor that really likes solid, stable growth, that\u2019s very annuity like, with growing margins, improving profitability and a business that generates significant amounts of cash and still has lots of innovation runway, we think Apple is a great place to be,\u201d said Kevin Walkush, portfolio manager at Jensen Investment Management.<\/p>\n But investors looking to buy into the next big growth market have turned their attention to AI. Nvidia<\/a> Corp. is taking Apple\u2019s place as the tech behemoth to own due to the seemingly insatiable demand for chips used to power large language models. \u00a0<\/p>\n Apple has fallen more than 10% this year, erasing around $330 billion in market capitalization, and ceding its position as the world\u2019s most valuable company to Microsoft<\/a> Corp., whose incorporation of ChatGPT into products like its Office software is starting to boost revenue growth. Microsoft now has a market value of almost $3.1 trillion versus Apple\u2019s $2.7 trillion. Nvidia, whose revenue and profits have soared amid an arms race for AI computing power, isn\u2019t far behind at $2.2 trillion.<\/p>\n The problem isn\u2019t so much that Apple has suddenly stopped growing, that\u2019s been happening for a while \u2014 its revenue shrank in every quarter of its last fiscal year even as the stock was hitting records. The trouble is the company hasn\u2019t shown anything on AI at a time when iPhones sales are sluggish and the company is facing mounting regulatory threats.<\/p>\n \u201cWe\u2019re going through an incredible wave of innovation,\u201d said Mark Lehmann, chief executive officer at Citizens JMP Securities. \u201cThe market is telling you that Apple has a lot to prove here and to date they haven\u2019t shown much.\u201d<\/p>\n Notoriously secretive, Apple has divulged little about its plans to incorporate AI services into its products. Chief Executive Officer Tim Cook has promised that Apple would \u201cbreak new ground\u201d in AI this year and market professionals are anticipating big news at the company\u2019s annual software developer\u2019s conference in a few months. However, many investors are losing patience and turning to stocks with a clearer path in AI.<\/p>\n At the core of Apple\u2019s woes is the disappearance of revenue growth and it\u2019s unclear what, if anything, will stoke it. The company\u2019s first major new product category in nearly a decade, the Vision Pro headset, isn\u2019t expected to contribute significantly to growth for years. Apple recently\u00a0pulled<\/a>\u00a0the plug on its long effort to build an electric car. At the same time iPhone revenue has stagnated and sales in China have dropped amid a weak economy and greater competition.<\/p>\n On top of that Apple is facing mounting pressure from regulators. Earlier this month, Apple was\u00a0fined<\/a>\u00a0about $2 billion by the European Union over an investigation into claims it blocked music-streaming rivals on its platforms. In the US, the Justice Department\u00a0appears<\/a>\u00a0close to filing an antitrust lawsuit after five years of work building a case alleging Apple imposed software and hardware limitations on iPhones and iPads to impede competition from rivals.<\/p>\n Sales in fiscal 2023 fell 3% and are projected to rise just 2% in the current year, according to data compiled by Bloomberg. By comparison, revenue expanded at a 33% clip in 2021. Meanwhile, Nvidia\u2019s sales are projected to jump 79% and Microsoft\u2019s 15% in the companies\u2019 current fiscal years.\u00a0<\/p>\n For the past couple of years, Apple has commanded a premium valuation on par with Microsoft\u2019s. Two years ago, when tech stocks got hit hard, the shares held up far better than those of its peers. But that\u2019s no longer the case. Apple is priced at about 25 times profits projected over the next 12 months, down from about 30 times last summer. That\u2019s similar to Walmart<\/a> Inc.\u2018s valuation. Microsoft, meanwhile, is priced at 32 times and Nvidia at 35 times.\u00a0<\/p>\n That said, Microsoft trading at a record high may actually offer a good example of Apple\u2019s long-term potential. When Satya Nadella took over the company in 2014 it was a software maker with a 20th century mindset and a languishing stock. Now it\u2019s everywhere, from the cloud to AI, and its stock is soaring.<\/p>\n \u201cEveryone has to reinvent themselves, and it just shows you how quick the revolution in tech is,\u201d Citizens JMP\u2019s Lehmann said. \u201cMicrosoft finally got going, but it took them 15 years to figure it out.\u201d<\/p>\n Despite this year\u2019s gloomy performance, it\u2019s easy to make the case that Apple shares are poised for a rebound and that it\u2019s too early to count it out of the AI race. The company has more than $170 billion in cash on its balance sheet and its net income is expected to top $100 billion this year. That gives Apple unmatched resources to push into new markets and still return cash to shareholders through dividends and stock buybacks.<\/p>\n \u201cIt\u2019s hard to not compare to what\u2019s the hot thing right now,\u201d Jensen Investment Management\u2019s Walkush said. \u201cIf you took AI out of the picture right now, and the sensationalism, would people look at Apple differently? I think they would.\u201d<\/p>\n<\/div>\n\nValuation Wipeout<\/h3>\n
Regulatory Pressures<\/h3>\n
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