Apple seeing strong uptake of iPhone 17 family: Kerwin

Key Concepts

• Valuation: The assessment of the current worth of an asset or company.
• iPhone Growth Deceleration: A slowdown in the revenue growth of Apple's iPhone product line.
• Evolutionary vs. Revolutionary Updates: Refers to product updates that are incremental improvements (evolutionary) versus those that introduce significant new features or form factors (revolutionary).
• AI Lagard: A term suggesting Apple is behind competitors in developing and implementing Artificial Intelligence technologies.
• In-house Chip Design: Apple's practice of designing its own processors and other chips for its devices.
• Auxiliary Chips: Components beyond the main processor, such as radio frequency and wireless chips.
• Pent-up Consumer Upgrade Demand: Consumer desire for new products that has been delayed, leading to a surge when new offerings are released.
• Default Search Provider: The search engine that is pre-selected on a device or platform.

Valuation Concerns and iPhone Growth

William Cerwin, senior equity analyst at Morning Star Research, maintains a "sell" rating on Apple stock, citing valuation as a primary concern despite the company's impressive recent quarterly results. Cerwin's bearishness stems from his expectations for the iPhone, which accounts for approximately half of Apple's total revenue. He observes a decelerating revenue growth for the iPhone, a trend that has been ongoing for several years. While Morning Star Research recently raised its valuation for Apple to $240 per share, Cerwin still considers this "rich" and believes the stock price is currently "frosty."

iPhone Growth Drivers and Headwinds

Cerwin identifies several factors contributing to his concerns about iPhone growth:

• Competition in China: China, once a growth engine for Apple, is now considered a headwind due to the rise of strong domestic alternatives.
• Evolutionary Updates in Western Markets: In core markets like North America and Europe, iPhone updates have been largely evolutionary rather than revolutionary in recent years. While the introduction of the iPhone Air represents a new form factor, Cerwin believes that the Pro models will continue to drive results, and he anticipates strong growth in 2026, attributing it more to pent-up consumer upgrade demand than to revolutionary design changes in the core models.

Apple's AI Strategy

Despite perceptions of Apple being a lagard in Artificial Intelligence, Cerwin does not believe it will be a long-term problem. He suggests that Apple has quietly improved its AI position over the past year, even if its marketing doesn't match competitors like Samsung Galaxy or Google Pixel. However, he notes that Apple has underdelivered on its AI promises made nearly two years ago.

Partnership Strategy for AI

Cerwin anticipates that Apple will succeed in its AI efforts by adopting a partnership strategy. He believes that collaborating with companies like OpenAI and Google Gemini will be more effective than Apple solely relying on building its own advanced large language models. This approach allows Apple to leverage external expertise while focusing on integrating AI into user-friendly features and products.

In-house Chip Design and its Impact

Cerwin highlights Apple's in-house chip design as one of its most significant achievements over the past decade. This strategy has already had a substantial impact:

• Control and Flexibility: Designing its own chips for iPhones, Macs, iPads, and even the Vision Pro provides Apple with greater control over its product development and supply chain.
• Higher Profitability: By not relying on external suppliers for core processors, Apple can achieve higher profit margins.
• Expansion to Auxiliary Chips: Apple is now extending its in-house design prowess to auxiliary chips, such as radio frequency and wireless components for iPhones, Apple Watches, and AirPods. This further enhances its control and potential for innovation and profitability.

Target Price and Market Sentiment

Cerwin's target valuation for Apple stock is $240 per share, which he considers a fair price based on his forecasts for growth and profitability. He notes that Apple's share price appreciation has been less significant this year compared to other "Mag Seven" stocks, yet he believes there is still considerable optimism baked into the current share price. His caution stems from the long-term perspective, considering the China headwinds and the evolutionary nature of iPhone feature growth, which he expects to lead to decelerating growth over time.

Potential for a Cheaper Computer

Regarding reports of Apple potentially releasing a computer priced below $1,000, Cerwin views this not as a sign of weakness but as a strategic move to target markets like education and compete with Chromebooks. However, he approaches such reports with skepticism, acknowledging that many rumored projects do not come to fruition. If such a product were launched, he anticipates it would be relatively successful but not a significant revenue driver for Apple compared to its premium MacBook offerings.

Google Partnership for AI Overhaul

Cerwin confirms the reports of Apple potentially paying Google a billion dollars annually for AI technology to overhaul Siri. He sees this as a logical step, especially considering that Google already pays Apple an estimated over $20 billion annually to be the default search provider on Apple devices. He interprets the $1 billion payment as potentially a discount on existing payments rather than a new expense. This partnership aligns with his view that Apple's strength lies in software and product design for user-facing features, not necessarily in developing cutting-edge large language models. Partnering with Google allows Apple to integrate advanced AI capabilities into its beloved products and features.

Conclusion

William Cerwin's analysis of Apple presents a nuanced "bearish" perspective primarily driven by valuation concerns. While acknowledging Apple's high-quality business and impressive recent performance, he argues that the current stock price does not adequately reflect the decelerating growth trajectory of its core product, the iPhone, and the competitive landscape, particularly in China. His outlook on Apple's AI strategy is cautiously optimistic, emphasizing the importance of strategic partnerships. The company's in-house chip design is recognized as a significant strength. Cerwin's target price of $240 per share suggests a belief that the stock is currently overvalued, despite the market's optimism.