'Fast Money' traders break down what Apple's iPhone 17 means for the stock

Key Concepts

• iPhone Refresh Cycle: The idea that existing iPhone users will upgrade to the new model, driving sales.
• AI Integration: The potential for Apple to incorporate artificial intelligence into its products and services.
• Valuation Multiple: The ratio used to determine the relative value of a stock (e.g., price-to-earnings ratio).
• Options Activity: Trading volume and patterns in options contracts, which can indicate market sentiment and potential price movements.
• Installed Base: The number of active Apple device users, representing a potential market for future products and services.
• Market Sentiment: The overall attitude of investors toward a particular stock or the market in general.
• Passive Investing: Investment strategies that track a market index, such as ETFs, which can influence stock prices.

iPhone Refresh Cycle and Analyst Surprise

The discussion begins with the surprising strength of the iPhone refresh cycle. Despite some analysts believing Apple has lacked innovation, the new iPhone is generating significant interest, evidenced by long lines at Apple stores. Analysts were caught off guard and had to upgrade their forecasts. The core argument is that the market had priced in "zero" expectation for this refresh cycle. Improvements like a better battery, camera, and sleeker design are driving demand.

Bridging to Future Innovation: Foldable Phones and AI

A key question is whether this iPhone refresh is enough to bridge the gap to Apple's next major innovations, specifically foldable phones and meaningful AI offerings. The current iPhone success could provide the necessary momentum.

Stock Performance and Valuation

The stock experienced three times its normal trading volume, partly due to short covering and options expiry. The previous high was around $260 in December, which is now a target. Despite innovation, Apple trades at approximately 31 times next year's earnings, with an estimated 10% earnings growth and 6% revenue growth. Margins have been relatively flat. While Apple has historically commanded a premium valuation, investors are paying a high price.

Options Market Activity

Options activity was exceptionally high, with over 2 million call options traded, making Apple the second busiest stock in the options market.

Valuation Comparison with S&P 500

Apple's forward P/E ratio of 31 is compared to the S&P 500's ratio of around 25. The S&P 500's compound annual growth rate on the revenue side is actually higher than Apple's. This raises the question of why investors should pay such a premium for Apple. While Apple generates significant free cash flow, the buyback story is less compelling due to the company's size.

Market Sentiment and Multiple Expansion

The market is currently at all-time highs with high forward multiples. Apple has maintained a high multiple (north of 30) for the past five years, even during market selloffs. This suggests that the market is willing to pay a premium for Apple due to its large installed base (2.3 billion or more) and the expectation of future refresh cycles.

AI Potential and Developer Ecosystem

The potential for Apple to integrate AI into its products and services is a key factor. The opening up of the Apple developer ecosystem to AI is seen as a significant opportunity. The argument is that Apple hasn't yet benefited from AI and has faced headwinds from China.

Google Antitrust Case and AI Opportunity

The Google antitrust case has unlocked a possibility for Apple in terms of an AI offering.

Value vs. Growth Stock

Apple was once valued as a growth stock with a lower multiple but is now valued as a growth stock despite behaving more like a value stock. This shift may be justified due to factors like its presence in numerous ETFs and the influence of passive investing. However, Apple is not immune to market selloffs.

Rotation within Large-Cap Companies

The discussion concludes by noting the rotation within the largest companies in the world.

Conclusion

The main takeaways are that the iPhone refresh cycle is exceeding expectations, driving short-term gains for Apple. However, the long-term valuation is debatable, with questions about whether the premium is justified given the growth rate compared to the broader market. The key to future growth lies in Apple's ability to successfully integrate AI into its products and services and leverage its developer ecosystem. The market's willingness to maintain a high multiple on Apple suggests confidence in its long-term potential, but the stock remains vulnerable to market corrections.