Apple (AAPL) stock is seeing its best day since May 2023, following an upgrade by Bank of America from “Neutral” to “Buy," raising the analysts' price target to $225 per share.
Bank of America Securities Senior IT Hardware Analyst Wamsi Mohan — the analyst behind Apple's new rating — joins Yahoo Finance Live to discuss how Apple is standing out and the reasoning for the call.
Mohan sees catalysts, such as generative AI-powered iPhones, services revenue, and the Vision Pro mixed reality headset, as factors that hold "long-term potential" for Apple.
Large-language model applications should create what is “initially a software-driven cycle that then morphs into both a hardware and software-driven cycle," Mohan says on AI. Additionally, Mohan notes that due to the quality of iPhone data, generative AI would be well suited to “provide really valuable, targeted advice” to users that would increase productivity and efficiency for the user.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
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Editor's note: This article was written by Eyek Ntekim
Video Transcript
JOSH LIPTON: Apple shares on track for their best day here since May of last year, and it comes after Bank of America said the stock is now a buy and raised its price target to $225.
Joining us now is the analyst behind that call, Wamsi Mohan, Bank of America securities senior IT hardware analyst. Wamsi, it is great to have you on the show. So, you know, Wamsi, we saw this series of downgrades on Apple from your colleagues on the Street kind of to kick off the year, but you come in, Wamsi, and you're telling your clients nope, Apple is a buy. How come, Wamsi? Walk us through the argument?
WAMSI MOHAN: Yeah, good afternoon. Thanks for having me on.
Look, I think that the way we look at the setup is really where are estimates going? So back in September of 2022, estimates were too high. We thought that $6.50 in EPS was way too high. We thought it was closer to $6. That's what played out. That's when we had downgraded the stock.
Now as we're standing here at the beginning of 2024, we think that there is some significant upside to estimate revisions in '24, '25, and '26, and that's the action that we took today. Stocks are fully correlated in the long term with estimate revisions, and we think that Apple will reflect that in its performance. So the upgrade today is really a call saying that we have a high degree of conviction that estimates for Apple will continue to move higher over the next three years.
And it's driven by several catalysts we can get into, but primarily it's about generative AI on iPhones. We think that that is going to be a major catalyst. Second, we think that the services revenue is reaccelerating. And third, we think the Vision Pro, while limited in its scope and capability to begin with at the given price point, has long-term potential, both on the hardware and on the services front. So we think there's ample room for a lot of things to go right over here where estimates will move higher.
JOSH LIPTON: And, Wamsi, I just want to drill down there into the call on the iPhone because it's interesting. What you see is this potentially multiyear, stronger iPhone upgrade cycle. And as you were saying, Wamsi, to your clients, what you're banking on here is Apple's going to introduce these kind of new AI-enabled iPhones in 2024, 2025. I'm interested, Wamsi, as you think through that, what are the kind of new AI features that you think are potentially going to wow consumers here?
WAMSI MOHAN: Yeah, absolutely. I think we have to bifurcate what is going to happen in software versus what is going to happen in hardware, right? When you think about the hardware, there's accelerated processing units. There's high-bandwidth memory. These are all things that will get introduced in calendar '25, not in '24. So the iPhone 16 will have a faster-- you know, the usual faster processor. You heard TSMC overnight talk about just how neural engines are getting embedded even more and more so on silicon. The die size is growing. So you will get some performance benefit.
But what you also see is Apple is doing a lot of work on the software end of things where you can start to run LLMs in very limited hardware scenarios where you have limited RAM, and you can expand this into flash, and there are written papers about this. So what you're really looking at is initially a software-driven cycle that then morphs into both a hardware- and software-driven cycle.
In this year, what we expect is that iOS 18 will have a lot of AI-enabled features. You've already seen a preview of this, right, like Galaxy S24 that just launched yesterday. You can see about all the real-time things that you can do in terms of translation, in terms of transcription, in terms of voice to text. There's a whole bunch of slew of things, features that have been introduced. I think Apple's going to do that and do that better. So that's what we expect in 2024.
In 2025, I think it's going to be a step-function change because some of the hardware is going to have more acceleration, more dedicated memory, and that is just going to change the game in terms of what you can do on device to a higher degree than what you would see even in '24.
MADISON MILLS: Wamsi, you mentioned that Samsung, also Google have beaten Apple to the punch when it comes to an AI-powered phone. What exactly are you betting on Apple to do better than those competitors?
WAMSI MOHAN: Yeah, I think what Apple has that none of these other players do is really consumer-centric information that's stored on the iPhone, right? They're very concerned about privacy, and so the information never kind of leaves the iPhone. But if you think about all-- every intention that you express, right-- like you want to travel. You go to your iPhone. You book something. You look up where you want to go travel. You want to go to a restaurant. The iPhone knows where you've been, right? So you've got perfect information, in some ways.
What does generative AI do? It takes high-quality data and generates inferences off of that high-quality data. Our contention is that iPhone has the highest-quality data about any person. Their personal iPhone is the repository of all the history of their life, literally, in their hands. And you take that, and you say, well, what can we do with this information? Well, if you run gen-AI rhythms on a phone like that with that information, you can give really valuable, targeted advice and be a real assistant of sorts as opposed to the way that Siri functions today.
So I think that it's more than, you know, what you can do in image manipulation and take away people from the background and add things in the foreground. This is much more central to improving productivity and actually using an assistant the way it should be used.