Apple, Inc. engages in the design, manufacture, and sale of smartphones, personal computers, tablets, wearables and accessories, and other varieties of related services. It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and Rest of Asia Pacific. The Americas segment includes North and South America. The Europe segment consists of European countries, as well as India, the Middle East, and Africa. The Greater China segment comprises China, Hong Kong, and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries. Its products and services include iPhone, Mac, iPad, AirPods, Apple TV, Apple Watch, Beats products, AppleCare, iCloud, digital content stores, streaming, and licensing services.
Investment Thesis: The Case for a Resurgent Apple (AAPL)
Investment Summary: While Apple’s stock has underperformed peers for much of the year, this widespread pessimism has created a compelling opportunity. We believe the market is overlooking the company's resilient fundamentals and the powerful, imminent catalysts of its aggressive new AI strategy. As these new AI-driven products and services begin to roll out, they have the potential to re-accelerate growth and drive a significant re-rating of the stock.
The Source of Pessimism: For much of 2025, a pervasive sense of pessimism has been the primary driver of Apple's underperformance, with the stock down over 17% year-to-date. The sentiment has been anchored in a few key fears:
Concerns over a slowing iPhone cycle and fierce competition in China.
A perceived lag in the AI race compared to rivals like Microsoft and Google, who have been more vocal with their strategies.
A potential negative impact from antitrust and regulatory scrutiny.
The Catalysts for a Reversal: The pessimism that has weighed on the stock is the very thing that sets the stage for a strong reversal. A recent earnings report and strategic announcements have begun to change the narrative:
Resilient Fundamentals: Apple's Q2 2025 earnings demonstrated remarkable strength, with a beat on both revenue and earnings. iPhone sales, in particular, showed double-digit growth in every geographic segment, including a recovery in Greater China. The Services business also hit a new all-time high, cementing its position as a high-margin growth engine.
An Awakening AI Strategy: The company is no longer seen as lagging in AI. It has announced a significant acceleration of its AI investment, with CEO Tim Cook calling the AI revolution "as big or bigger" than the internet. The company's new "Apple Intelligence" framework, a privacy-first approach that combines on-device processing with secure Private Cloud Compute, is a differentiator that could resonate with users. Furthermore, Apple is now working on a ChatGPT-like "answer engine" and a revamped Siri, with new products and features expected in late 2025 and 2026.
The Power of the Installed Base: Apple's strength lies in its over 2 billion active devices. As the company rolls out its new AI features, this massive and loyal user base provides a powerful, built-in audience for adoption, ensuring these innovations are monetized at a scale few companies can match.
Conclusion: The pessimism that has clouded Apple’s stock for most of the year is now starting to give way to optimism about its strong underlying business and its ambitious, yet-to-be-fully-realized AI strategy. We believe the stock is currently undervalued and that as these new AI capabilities become a tangible reality for consumers, the market will re-evaluate its outlook, making Apple a compelling investment at its current levels.
Price Target:
We have a base case 2025 price target for AAPL shares at $226, by applying a 30x multiple to 2025's mean estimated EPS of $7.31. For the bull case, per Morgan Stanley's estimate of $8.34 EPS, our price target would be at $250. This is rooted on expectations that over the next 2 years, due to the aforementioned upgrade cycle, Apple can grow its EPS at 15% CAGR. In the last 10 years, Apple has traded at an average 2.0 PEG ratio (3.0x in the last 5 years). Therefore, with EPS growing 15% annually, we think a ~30x target P/E multiple can be well justified by Apple's historical trading ranges.