Apple, the World's Most Valuable Stock, Is Still Underestimated

By Alex Eule

Fed Day was the highlight of the week, but Apple deserves an honorable mention. Friday was Apple's annual holiday, with new iPhone 16 models arriving in stores. It's a joyous moment for Apple fans. For investors, it's more complicated.

The skilled folks on the Dow Jones Market Data team have tracked Apple's stock around every iPhone release. By now, there's an ample sample size across 17 years.

The stock has declined an average of 0.1% on the day new iPhones are announced. On launch day -- a week or two later -- shares slip another 0.1%. Over the following week, Apple slightly underperforms the market.

Day traders are free to short the iPhone launch, but everyone else should go long -- way long.

Six months out from iPhone releases, Apple stock has returned an average of 11.7%, eight percentage points better than the S&P 500 index. All told, Apple has returned an annualized 26% over the past decade, a whopping 15 points ahead of the large-cap index.

All of this confirms what I've observed for years: Wall Street talks down new iPhones and then rushes to catch up with the reality that consumers still love them. Somehow, the market's largest company remains one of its most underestimated.

This past week, one tech newsletter I regularly read bemoaned Apple's "listless hardware innovation," citing the dullness of a new Apple Watch that detects sleep apnea and AirPods that now serve as hearing aids. Solving problems that affect millions of people -- at a far lower cost than current offerings -- is the definition of innovation, at least in my book.

I get it -- there's heavy nostalgia surrounding Apple. Fans and investors still long for the days of Steve Jobs pulling the curtain off an all-new device.

Apple shares jumped 8% the day that Jobs unveiled the first iPhone in January 2007. Incremental updates to phones, watches, and headphones don't generate the same kind of enthusiasm. But Apple is playing the long game, and it has mastered the art of marginal gains.

I won't argue that every iPhone is a must-have purchase. Consumers are fine waiting two to four years. In the meantime, Apple will sell you AirPods, Watches, Macs, and related services. Over the past decade, iPhone sales have gone from 66% of Apple's total revenue to 52%. Apple's business -- and stock -- can now work without heroic numbers from the iPhone.

This past week, I downloaded macOS Sequoia, the new operating system for Macs. The software isn't a game changer, but it's a sneak peek into a future where Macs and iPhones fully converge. The new "iPhone Mirroring" feature added an iPhone application to my Mac screen. Click the phone icon, and my iPhone pops up on the Mac screen. Everything can be easily navigated from there.

Today, this is mostly an excuse not to reach for my phone. But there's a path to the Mac running individual applications from my iPhone, and easily dragging files, photos, and video clips between the two. That could spur sales of both devices, and I'd expect to see that in a future macOS release.

As investors fret about the latest iPhones, others worry about Apple's ability to compete in artificial intelligence. This isn't new. "Investors have all but given up on Apple and AI. And that feels like a major oversight," I wrote in this column on April 19. As with the iPhone now, I suggested that investors take a longer-term approach.

That day turned out to be a bottom for Apple stock. I won't take too much credit, but from that point on, investors slowly began to embrace Apple's AI bona fides. The company introduced its plans for Apple Intelligence in June, kicking the stock into a new gear. Shares are up 39% since my column, more than double the market, and Apple has retaken its spot as the world's largest company by market value.

Today, the sentiment has turned again. It isn't just that the iPhone 16 is a hodgepodge of incremental updates. Once again, the market is worried about Apple's AI. Apple Intelligence's launch has been delayed until next month, and some of the more momentous features won't come until next year.

Apple's AI-powered summaries and emojis might not be groundbreaking, and the efforts from OpenAI, Alphabet, and Microsoft might be more advanced. But Apple isn't just producing AI. It's producing AI that's made for the most loved smartphone on the market. And the best laptops and smartwatches. And the only tablet worth buying. Every time Apple makes an incremental improvement, each of those devices gets better, too.

It's difficult to know what impact the negativity is having on Apple's stock. Shares, after all, are near record levels. And the company trades at a generous 31 times next year's earnings estimate. But record levels haven't been impediments in the past for Apple shares. And the price/earnings ratio will come down, if Apple beats expectations.

Today, analysts are fairly bearish, which leaves potential upside as upgrades roll in.

More than 30% of the analysts covering Apple have a Hold or Sell rating on the stock. That's the weakest sentiment for any of the Magnificent Seven stocks, save for Tesla. Just 5% of analysts give Microsoft and Amazon.com a similarly lukewarm review.

Apple has gotten comfortable being underestimated. For investors, it's an evergreen opportunity.