Apple Inc. has primarily been a hardware company over the years. From the Mac to the iPods to modern-day iPhones, its innovation is centered around hardware devices. Having said that, Apple also has software in the form of iOS that is unmatched in the industry. Yet its apps leave a lot to be desired, focusing on giving users what they may need rather than innovating and designing software that moves the industry.
The company’s stock currently trades at around $255. This equates to a valuation of 3.86 trillion. A $10 increment in the share price would bring the company’s valuation to $4 trillion, making it the first company ever to reach this milestone. Investors are divided on whether this high valuation is justified, and just like the company itself, seem confused about how Apple is going to improve its software game.
Take for instance Apple Pages. Word-processing software is used by millions of people as part of their daily work. Yet even on Apple’s own devices, they are not the go-to app for word processing. The same goes for its maps, voice memos, and book apps. To make matters worse, Apple is struggling to launch AI features on time as its counterparts, especially in China, race ahead.
It has now been 3 years that Apple is hovering between $370 billion and $400 billion in trailing twelve-month revenues. If it is going to justify a $4 valuation with such stagnant revenue growth, it will have to do more than just launch another good iPhone. For many, the answer lies in the company’s software. As much as we would like to complain about Apple’s software efforts, we can’t deny that this is also the area in which Apple can show the most improvement. We believe the time to show that improvement is now, as companies race to deliver AI features to improve productivity and workflows.
Apple’s 2025 AI plans give investors some hope. The company plans to roll out multiple Apple Intelligence features that should attract attention. The top priority seems to be Siri, which hasn’t lived up to the hype over the years. If there was ever a time for Siri to help Apple device owners, it is now! Powered by AI, the software will get a redesign and thanks to a better understanding of natural language, it should now be able to perform better. Improvements like ChatGPT integration, Summaries, and Priority Notifications won’t necessarily help Apple make more money, but they should improve user experience at a time when customers may get overwhelmed using the new features on their devices.
While we aren’t bearish on Apple, we believe its hardware segment has limited upside. The company has ignored the software side of the business for quite long and now seems to be the best time for the company to make software a priority. With Apple intelligence, the software could get a rework, driving future growth and our bullish thesis on the stock.
Apple is 7th on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 160 hedge fund portfolios held AAPL at the end of the third quarter which was 165 in the previous quarter. While we acknowledge the potential of AAPL as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as AAPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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