Third Point believes that demand for ai could significantly boost Apple’s revenue and profits in the coming years.
Apple (APL-American Lead Association) In July, Apple unveiled a preview of its “Apple Intelligence” artificial intelligence feature. The feature could help improve Siri, automatically generate emails and images, and sort notifications. However, the release includes only a partial set of features, not the full package.
According to Bloomberg, the ai system will debut in October, after the release of iOS 18. Apple also says it will roll out more ai features, including image and emoji generation, automatic photo cleanup, and integrated ChatGPT over the next year.
“Despite the recent strong appreciation in the stock, we see room for significant upside ahead as the magnitude of this new ai opportunity becomes more apparent,” Third Point CEO Daniel Loeb said in an Aug. 23 letter to investors.
Apple CEO Tim Cook said during the company’s August earnings call that the company will “continue to make significant investments” in its Apple Intelligence technology. “We’re very excited about Apple Intelligence and remain incredibly optimistic about the extraordinary possibilities of ai.”
Apple expects strong revenue growth for the September quarter
On August 1, Apple announced strong fiscal third-quarter results. The company earned $1.40 per share, above the consensus estimate of $1.35. Apple's revenue of $85.78 billion, up 4.9% from a year ago, beat the estimate of $84.53 billion. It was also a record result for the third quarter.
Apple's main business remains the iPhone. iPhone revenue was $39.3 billion, down 1% from a year ago but beating analysts' estimate of $38.81 billion. It accounts for about 46% of the company's sales. A new iPhone model is expected to be released this fall.
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The iPad segment showed the biggest growth, with sales up nearly 24% year-over-year to $7.16 billion. About half of iPad buyers were new buyers, indicating the tablet market is not yet saturated, according to Apple Chief Financial Officer Luca Maestri.
Apple's sales in Greater China, including Taiwan and Hong Kong, fell 6% to $14.72 billion as local rivals put pressure on sales.
Apple expects fiscal fourth-quarter revenue to grow year-over-year at a similar pace to the June quarter, Maestri said on the earnings call. Fiscal third-quarter revenue growth was about 5%.
Third Point says Apple stock is “under-owned” by institutions
Third Point began buying Apple stock in April, and the tech giant was one of the top five gainers in its portfolio in the second quarter. Apple shares gained about 23% during the period.
“Despite Apple's dominance as a company, its stock had become increasingly 'under-owned' by institutional investors and its relative multiple had compressed toward a multi-year low,” Loeb said, citing “several years of stagnant earnings growth” and concerns that Apple could become an “ai loser.”
“Our research led us to a different conclusion: we believe ai-related demand could drive a dramatic improvement in Apple’s revenue and profits in the coming years,” he added.
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The hedge fund's flagship fund, Offshore Fund, returned 1.8% in the quarter ended June 30, lower than the S&P 500's gain of 4.3% over the same period.
The company said growth was “largely driven by technology companies,” but diversification into other sectors such as industrials, consumer goods and health care partly offset gains. Its biggest losers were Bath & Body Works. (BBWI) Advance car spare parts (AAP) Ferguson PLC, Airbus SE and payments company Corpay, formerly Fleetcor.
Analysts have revised their price targets for Apple shares following the earnings and outlook.
Citi raised its target on Apple from $210 to $255 and maintained its buy rating after seeing Apple's financial results, which “beat expectations and grew.” The analyst was encouraged by the initial positive comments about iOS 18's new ai features and management's belief that ai will drive major iPhone upgrades.
Goldman Sachs also raised Apple's price target from $265 to $275 and maintained its buy rating. The analyst believes Apple is approaching a multi-year iPhone replacement cycle.
More Wall Street analysts:
- Analysts update target price on Grand Theft Auto maker's stock
- An American Express stock analyst warns of a worrying shift in consumer behavior
- Analyst reinstates Nvidia stock price target ahead of earnings
“The company reported solid earnings, driven by the iPhone, that beat expectations in the fiscal third quarter, with continued momentum in the services sector,” the analyst tells investors in a research note.
Barclays analyst Tim Long cut his target on Apple to $186 from $187 with an underweight rating.
“Fiscal third quarter data was better than expected, led by iPad, and fourth quarter revenue guidance slightly beat Wall Street's forecasts, though slightly below Barclays',” Long wrote. However, he is concerned about sales in China, regulatory risks and uncertainty around iPhone 16 sales and ai features.
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