Citi Hails Apple's AI Strategy: Maintains Buy Rating

Key Metrics for Apple

Stock Rating: Buy
Revised Price Target: $210.00 (remains unchanged)
Stock Price (June 10, 2024): $193.12

Summary Points

• Citi maintains a Buy rating for Apple with a target price of $210, driven by AI integration and expanding gross margins.
• Apple's AI strategy, including advanced language and image processing, is expected to drive a significant refresh cycle for iPhones and Macs.
• Strategic partnerships, such as with OpenAI for Siri, and a focus on privacy, bolster Apple's market position and growth prospects.

Apple's AI-Powered Future: A Game-Changer for Investors

Apple Inc. (AAPL.O) has once again captured the spotlight with its recent Worldwide Developers Conference (WWDC), which Citi analysts have hailed as the best in years. The event showcased Apple's ambitious AI strategy, dubbed "Apple Intelligence," which aims to integrate advanced AI capabilities across its ecosystem. This strategic move is expected to drive a significant refresh cycle for iPhones and other Apple devices, bolstering investor confidence. Citi maintains its Buy rating for Apple, with a target price of $210, reflecting an 8.7% expected share price return from the June 10, 2024, closing price of $193.12.

AI Integration: A Catalyst for Growth

Citi's valuation of Apple at $210 is based on a 30x P/E multiple applied to the FY2025 EPS estimate of $7.14. This premium valuation is justified by Apple's expanding gross margins, growing services sales mix, and robust balance sheet. The introduction of Apple Intelligence is a key driver behind this optimistic outlook. The AI features, which include advanced language and image processing capabilities, are designed to enhance user experience while maintaining privacy. These features will be available on the iPhone 15 Pro Max and Macs this fall, with all iPhone 16 models expected to be AI-capable. This integration is anticipated to drive a super cycle refresh, as developers will have ample time to create new apps leveraging these AI capabilities.

Citi analysts noted, "We believe Apple’s WWDC was the best WWDC conference in a long time as it introduced 'AI for the rest of the people'."

Strong Financial Performance and Market Position

Apple's financial performance remains robust, with Q1'24 EPS of $2.18 and a projected FY2024 EPS of $6.48. The company's diversified revenue streams, including iPhone, iPad, personal computers, and services, provide a stable foundation for growth. The AI-driven refresh cycle is expected to further strengthen Apple's market position, particularly in the smartphone segment, which accounts for 50% of its revenues. The integration of AI features is also likely to drive higher average selling prices (ASPs) for iPhones, contributing to gross margin expansion.

Strategic Partnerships and Privacy Focus

Apple's partnership with OpenAI to integrate GPT-4o into Siri is a significant development. This collaboration will enable Siri to leverage advanced AI capabilities for tasks such as generating content and images, while ensuring user privacy. The AI features will operate on a hybrid model, with on-device processing as the cornerstone and more complex requests handled on private compute servers. This approach aligns with Apple's commitment to privacy and security, which is a key differentiator in the market.

Outlook

Citi remains bullish on Apple's long-term prospects, driven by the company's innovative AI strategy and strong financial performance. However, there are risks to consider, including potential macroeconomic headwinds and regulatory challenges. The primary risks to the price target include weaker-than-expected consumer demand and geopolitical tensions affecting Apple's supply chain. Despite these risks, Apple's strategic investments in AI and its robust ecosystem position it well for sustained growth.

Citi analysts emphasized, "We rate Apple shares Buy. Macro woes and impact on consumer spending are valid concerns, but we believe Apple's growth in active installed base of products and subscriptions is sticky, and should help to drive demand in future years."