Apple Stock Is on a Roll. 2 Reasons It Can Keep Going.

Apple CEO Tim Cook is leading the company’s integration of artificial intelligence. (JUSTIN SULLIVAN/Getty Images)

Key Points

• Apple’s shares slipped in early trading, having closed at a record high on Thursday.
• The new iPhone 17 series is driving a strong upgrade cycle, with iPhone revenue expected to show double-digit growth in the current quarter.
• Services revenue grew by 15%, contributing significantly to profitability, though concerns exist regarding Apple’s AI investment strategy.

Apple looks to be back in the groove.

After lagging behind the broader market for much of the year, the iPhone maker has roared back in recent months. Wall Street analysts are generally positive despite some concerns about its artificial-intelligence initiatives.

Apple shares were up 0.4% at $272.59 on Friday, having closed at a record high the previous day. On the face of it, its forward price/earnings ratio of 33 times looks expensive for the 8% revenue growth it reported for the third quarter. But there are reasons to be optimistic.

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First, Apple’s earnings on Thursday underlined the early success of the new iPhone 17 range. With iPhone revenue set to be up by double digits in the final quarter of the year, the long-awaited wave of smartphone users upgrading their phones looks to be here.

The company achieved 6% iPhone revenue growth for the September quarter despite a drop in sales in Greater China, a major market for Apple. The company attributed that to supply constraints meaning it wasn’t able to match demand, saying it expects to return to growth in the region in the December quarter.

“We are raising our revenue growth forecasts materially on the momentum of the product cycle, which we expect to sustain with the iPhone 18 series as well,” wrote J.P. Morgan analyst Samik Chatterjee in a research note. He raised his target price on Apple stock to $305 from $290, keeping an Overweight rating.

Apart from hardware, Apple’s other big driver of revenue is services. It struck an upbeat tone there as well, with 15% growth. Services revenue, where Apple includes the estimated $20 billion a year it receives from Google for making it the default search provider on its devices, is extremely profitable for Apple due to its high margins.

Melius Research analyst Ben Reitzes raised his target price on Apple stock to $345 from $290. His call is the highest on Wall Street, according to FactSet.

“Our estimates for Services no longer have the segment decelerating toward 10% [growth] long-term given our view that payments from Google continue and other areas continue to grow at strong double-digit rates,” Reitzes wrote. “Concerns around Services should be put to rest.”

That means all is clear for Apple stock to rally, except for concern about AI. Apple noted that the cost of AI would push up its operating expenses, but didn’t give much detail on what kind of features it was developing. That combination worried some analysts.

“The upside surprise from strong iPhone 17 demand and Services momentum are partially offset by accelerated R&D investment in AI. Management’s decision to accelerate investment in AI seems to significantly lag its peers,” wrote Oppenheimer analyst Martin Yang.

He kept a Perform rating on the stock with no price target.

Write to Adam Clark at adam.clark@barrons.com