Apple initiated with Neutral at MoffettNathanson on challenges to AI-driven iPhone upgrade cycle

MoffettNathanson began coverage of Apple (NASDAQ:AAPL) with a Neutral rating and $211 price target.

The analysts compares the underpinnings of an AI-driven iPhone upgrade cycle to the conditions which prevailed at the start of the 5G upgrade cycle. There are several reasons why it will be challenging for an AI upgrade cycle to match that one, mainly outside the U.S., where a combination of regulatory hurdles and geopolitical considerations are likely to restrain Apple’s AI roll-out and adoption.

And yet, Apple’s valuation today is already substantially more than it was for the 5G cycle. There is one more unflattering comparison to the 5G upgrade cycle of 2021/22. Interest rates are now higher, which means that growth rates will have to be significantly higher this time to warrant a similar multiple, according to the analysts.

The analysts also highlighted the regulatory considerations that at this point should be viewed largely as risks rather than base-case forecasts, but which nevertheless simply cannot be ignored. A vital one among these is the risk posed by the U.S. government’s antitrust litigation against Google, which poses a genuine threat to the enormous payments Google makes to Apple each year to be the default search engine on Apple devices.

The analysts added that in many cases, their estimates are above consensus. But sell-side consensus does not fully capture the level of optimism that is built in Apple’s current multiple. Apple’s share price already embeds an aggressive terminal growth assumption which would seem to be significantly more generous than sell-side estimates imply.

Apple (AAPL) has a Hold rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ average rating is also Hold, but the average Wall Street analysts’ rating is more positive with a Buy.