Apple's stock is up 25% from its April low. Here's how it can gain another 25%.

By Emily Bary

An analyst thinks Wall Street still underestimates AI's potential to drive iPhone device upgrades

Apple Inc. is making up for time spent being seen as an artificial-intelligence laggard, with shares up more than 25% from their April lows in a move that partly reflects optimism about the latest AI announcements at WWDC.

But Apple shares (AAPL) may not be done seeing AI-fueled gains, according to Melius Research analyst Ben Reitzes, who boosted his price target on the stock to $260 from $227 in a Monday report. His new target implies about 25% upside from Friday's close.

"While we like the AI story right now, we still think it 'boils' gradually as features are released, hitting its peak stride" in the next two fiscal years, Reitzes wrote.

See also: Why Google is one of the big winners from Apple's WWDC

The most appealing element of Apple's AI strategy is that "almost everyone needs a new phone" to unlock Apple's forthcoming AI features since the company has limited the functionality to iPhone 15 Pro models or better.

And, critically, Apple has shown off its AI functions in ways that are "compelling to the layman," so people should actually want to upgrade in order to try them out. Plus, many people are using old iPhones bought during the pandemic, and unlike with other electronics, people wear down their smartphones through heavy use.

"We are fans of embracing the obvious, even from here, since the world's most loyal install base has to upgrade to get AI - and we see [earnings-per-share] power going over $9," Reitzes wrote. "While we have reflected several times on a potential surge akin to the 2014/2015 'big screen' cycle, we really don't recall a precedent like this - with so many new features only available in new phones."

Read: Apple's stock could be set to surge, if history is any indication

Reitzes anticipates that Apple will start to see the iPhone business accelerate nicely in the December quarter, and he thinks the consensus view underestimates the company's opportunity. For instance, consensus expectations imply 4% iPhone revenue growth in fiscal 2025 and 2% growth in fiscal 2026, while Reitzes' new estimates call for 7% and 10% growth, respectively.

"We are not overly concerned about pricing being an obstacle since many consumers in developed markets pay by the month," he wrote.

Further, he sees the potential for AI to give a lift to other Apple products and service categories. For instance, AI could make people's data more valuable and also eventually give way to video-generation features, all things that could boost the usage of iCloud storage.

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-Emily Bary

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06-24-24 1146ET

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