Apple shares moved lower in early Friday trading after the tech giant posted a muted holiday-quarter outlook that suggests a longer time frame for its AI investments to ultimately boost iPhone 16 demand.
Apple (AAPL) is betting that that its new AI technologies, dubbed Apple Intelligence, will prompt a big increase in handset upgrades as consumers look to adopt the new features that will be available only in the new iPhone 16 and last year's iPhone 15 Pro.
The rollout of those features, which include upgrades to its Siri voice assistant, an AI image generator and notification summaries, will take several months, and will be fully available only in certain markets, as Apple deals with language, tech and regulatory challenges.
"Carrying on in the quarter, we are looking forward to bringing even more features in December, and this will include even more powerful writing tools and visual intelligence experience that builds on Apple Intelligence and ChatGPT integration in addition to other features as well as we'll bring localized English to several countries that include the U.K., Australia, and Canada," CEO Tim Cook told investors on a conference call late Thursday.
"So, it's going to be quite a software quarter between the release on Monday and the release in December," he added. "And then as we turn the corner to '25, we'll have more languages rolling out in - starting in April as well and more features as well."
Apple CEO Tim Cook said the tech giant's AI features will be a 'compelling reason' to upgrade to its new iPhone 16.
That delay, in fact, is part of the reason Apple's near-term revenue forecast, which estimates December-quarter sales rising in the low-to-mid-single digits percent, was seen as largely disappointing for investors who were looking for an early indication that Apple Intelligence was sparking demand for the newly released iPhone.
Apple AI benefits a 'waiting game': analyst
"This is still a waiting game when it come to the benefits of AI iPhone growth," said Deepwater Asset Management's Gene Munster, who remains convinced that AI will ultimately be the catalyst for an iPhone upgrade "supercycle.''
"The most potent piece of this demand acceleration is likely to come in the June quarter," he said. "I don't think it's going to play out in December."
KeyBanc Capital Markets analyst Brandon Nispel agrees, arguing that the below-consensus guidance for December-quarter revenue means "expectations should reset lower, which should pressure the stock as expectations seem far too high looking out to 2025 and 2026."
Nispel reiterated his underweight rating and $200 price target on Apple stock following last night's update.
Apple's earnings for the fiscal fourth quarter ended in September were $1.64 a share, up 12.3% from the year-earlier period and 4 cents ahead of the Wall Street consensus forecast. Removing a one-time charge to reflect a recent European ruling on taxes trims the fourth-quarter total to 97 cents a share.
Group revenue, Apple said, rose 6% from a year earlier to $94.93 billion, narrowly topping the consensus analyst estimate of $94.56 billion. IPhone sales rose 5.5% to a September-quarter record of $42.2 billion.
Muted holiday forecast at Apple
Finance chief Luca Maestri said current-quarter sales, a key metric for investors, would likely rise by low- to mid-single digits percent from the year earlier's $119.58 billion, a forecast that was largely shy of Wall Street forecasts.
Wedbush analyst Dan Ives, who carries an outperform rating and $300 price target on Apple stock, said the holiday-quarter guidance suggests iPhone growth of around 5%, "generally in line with [Wall Street] expectations."
"Apple delivered a very strong September quarter with iPhone revenues that beat the Street by $1 billion on the top line with the iPhone 16 upgrade cycle showing initial success out of the gates," Ives said.
"The step by step rollout of Apple Intelligence will result in a strong December quarter but will also flow into the March and June quarters, which should be good news for" Apple's fiscal 2025, he added.
D.A. Davidson analyst Gil Luria, who reiterated his buy rating and $260 price target, also sees a bullish tone to the underlying iPhone 16 demand story.
"Despite Apple Intelligence rolling out slower than we had initially anticipated, we continue to believe it's a strong catalyst for iPhone 16 growth that increases as more features are released, which are expected to hit iPhones in December and next calendar year," he said.
Apple's Cook: 'Compelling reason' to upgrade
Oppenheimer analyst Martin Yan noted, however, that "the gradual rollout and support for non-English languages may create a different sales cadence compared to previous iPhone cycles."
But he added that "our bullish outlook on Apple Intelligence and its positive impact on iPhone replacement in [calendar year 2025] remains unchanged."
Yan reiterated his outperform rating and $250 price target, citing Apple's highlighting of "strong initial interest in Apple Intelligence, with an adoption rate of [software update] iOS 18.1 that is double that of iOS 17.1."
Still, the overarching narrative from Wall Street following last night's earnings update appeared to be patience, with a host of top analysts reiterating their price targets. including Citigroup's Atif Malik ($255 a share) and Piper Sandler's Matt Farrell ($225).
"It's clearly a different cadence" in terms of iPhone 16 demand, Cook told investors. "As we talked about at WWDC, we wanted to give a comprehensive vision of Apple Intelligence, and we said then that it would roll out over time ... and we're executing well."
"In terms of the demand curve, I would just say that we believe [Apple Intelligence] is a compelling reason for upgrading," he added. "And that's both my personal experience and feedback that I'm getting. So, we'll see."
Apple shares were marked 0.35% lower in early Friday trading to change hands at $225.15 each, a move that would trim the stock's year-to-date gain to around 7%.
