Apple stock sentiment improving says JPMorgan as AI could help re-rating

Despite the broader market's rally, Apple's (NASDAQ:AAPL) stock has faced challenges this year, with its year-to-date performance reflecting a downward trend at -10.35% year-to-date.

This decline in Apple's stock value has occurred even as the S&P 500 experienced a notable uptick. However, amidst this backdrop, there is a glimmer of optimism as JPMorgan recently indicated that the sentiment surrounding Apple's stock is showing signs of improvement.

Moreover, JPMorgan underscored the potential of AI, a game-changing technology, to re-rate Apple's stock, potentially leading to a significant turnaround.

JPMorgan says Apple stock sentiment is on the up

JPMorgan analysts said in a note Thursday that sentiment towards Apple is improving with hedge fund investors despite deteriorating data points.

“Contrary to the deterioration of fundamentals relative to both hardware demand as well as outlook for services growth, the interest in AAPL shares have improved from the broader group of investors who have otherwise been averse to the premium valuation multiple despite one of the lowest growth outlooks relative to the other mega cap tech stocks,” wrote the investment bank.

The bank explained the drivers of the increase in enthusiasm for Apple are the fact that the valuation premium is moderating following the Apple stock decline, and the artificial intelligence-led iPhone upgrade cycle.

“The increasing appetite from investors has largely been driven by interest in participating in the cyclical upsides associated with the AI on-device led upgrade cycle, with investors taking the cue from the 5G led upgrade cycle,” added JPMorgan.

Investors may be wrong on Apple stock again

The bank highlighted various Apple headwinds, such as iPhone sales data points, including demand in China, the cancellation of the future opportunity around Automotive revenues, and the downside risks to Services on account of higher regulatory scrutiny in multiple geographies.

However, they state that at the same time, hedge funds are eyeing the headwinds to create more tactical entry points ahead of the AI upgrade cycle.

The firm sees some similarities with the 5G cycle. For example, hardware adoption potentially running ahead of the consumer understanding of the use cases and is driven more by expectations of robust use cases, “even though the asked questions today are about the AI use cases.” In addition, the replacement cycle being temporarily accelerated for two to three years on account of the upgrade cycle and the lack of backward compatibility. For example, 5G capability could not be activated on prior generation 4G phones, while JPMorgan expects the absence of AI feature availability on older phones.

Elsewhere, BofA said in a recent note that investors have significantly underestimated Apple’s gross margins.

In its analysis, the bank said the Street was modeling FY23 gross margins for Apple at
39% but in reality, Apple printed 44% gross margins, “significantly exceeding (500bps)
original expectations.”

“In our opinion, the Street continues to underestimate the long-term gross margin potential for Apple across both products and Services yet again, where we see about 180bps of Product gross margin upside and about 150bps of Services margins upside over the next few years,” they wrote.