Bill Cara
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Using AI to study Apple (AAPL): The Value Depends on the Quality of the Input

December 22, 2024

I summed up my thoughts at the end of this experience with chatGPT.

I uploaded a detailed December 9 PDF report on AAPL and prompted chatGPT to analyze it, present its analysis in point form, and follow up with a SWOT analysis.  

In about ten seconds, the following information was sent to me.

ChatGPT said:

ChatGPT

Performance and Projections

  • Recent Stock Price: $246.75
  • 18-Month Target Price Range:
    • Low: $204
    • High: $329
    • Midpoint: $267 (10% upside to midpoint)
  • Long-Term Projections (2027-2029):
    • High: $320 (+30% price gain, 7% annual total return)
    • Low: $260 (+5% price gain, 2% annual total return)

Key Metrics

  • Market Capitalization: $3.7 trillion (Large Cap)
  • Price-to-Earnings (P/E) Ratio:
    • 2024: 32.0 (average annual)
    • Relative P/E: 1.78
  • Dividend Yield: 0.5%
  • Return on Shareholders’ Equity: Projected at 170%-188% for 2025-2029.

Financials

  • Revenue Growth:
    • Past 5 years: 14.5% annually
    • Future projection (2021-2029): 9% annually
  • Profit Margins:
    • Net Profit Margin (2024): 24.1%
    • Projected (2025): 26.3%
  • Earnings Growth:
    • 2024 EPS: $6.08
    • 2025 EPS Estimate: $7.25 (+19% growth)
  • Services Division:
    • Gross Margins: 74% (vs. Products at 36.3%)
    • Revenue growth in 2024: +12% to $25 billion.
    • Over 1 billion paid subscriptions, more than doubling in 4 years.

Debt and Cash Position

  • Total Debt: $96.7 billion
    • Long-Term Debt: $85.8 billion
    • Due in 5 Years: $46.0 billion
  • Cash and Equivalents (9/28/24): $65.2 billion

Notable Achievements in 2024

  • Record fiscal Q4 revenues: $94.9 billion (+6% YoY)
  • Product Sales Growth:
    • iPhone: +5.5% to $46.2 billion
    • iPad: +8% to $6.95 billion
  • Integration of Apple Intelligence with ChatGPT.

Stock Quality

  • Safety Rank: 1 (Highest)
  • Timeliness Rank: 2
  • Technical Rank: 4 (Lowered on 12/20/24)
  • Price Stability: 85
  • Earnings Predictability: 85

Outlook

  • Strong growth prospects supported by:
    • New product launches: iPhone 16, Apple Watch Series 10, AirPods 4.
    • Momentum in the Services division.
    • Anticipation of record sales and earnings in 2025.
  • Conservative accounts may find the stock attractive despite limited upside potential.

Here’s a SWOT analysis for Apple Inc. based on the report:

Strengths

  1. Market Leadership:
    • Among the world’s largest makers of consumer electronics with strong brand recognition.
    • Dominance in multiple product categories like iPhones, iPads, and Mac computers.
  2. Financial Stability:
    • High gross margins in the Services division (74%).
    • Strong cash position ($65.2 billion).
    • Consistently high return on shareholders’ equity (170%-188% projected for 2025-2029).
  3. Innovation:
    • Launch of new products such as iPhone 16, Apple Watch Series 10, and AirPods 4.
    • Introduction of Apple Intelligence with ChatGPT integration.
  4. Recurring Revenue:
    • Over 1 billion paid subscriptions, doubling over 4 years.
    • Services division showing consistent double-digit growth (+12% in 2024).
  5. Stock Quality:
    • High safety rank (1) and price stability (85).
    • Market capitalization of $3.7 trillion, indicating investor confidence.

Weaknesses

  1. Dependence on Flagship Products:
    • iPhone remains the dominant revenue driver, contributing heavily to overall growth.
  2. High Valuation:
    • Elevated P/E ratio (32.0), which may deter value-focused investors.
  3. Profitability Challenges:
    • Products segment gross margins are significantly lower (36.3%) compared to the Services division.
  4. Declining Book Value:
    • Historical decline in book value per share (-2% over 10 years).

Opportunities

  1. Growth in Services Division:
    • Expansion of highly profitable services with growing subscriptions and higher margins.
    • Potential to become the main profit engine in the near future.
  2. New Product Categories:
    • Continued innovation in hardware (e.g., new iPhone and wearable tech) and software.
  3. Geographic and Market Expansion:
    • Opportunities to grow in underpenetrated markets globally.
  4. Technology Integration:
    • Leveraging AI advancements and ChatGPT integration to enhance user experience and operational efficiency.
  5. Holiday Season Sales:
    • Positioned to capitalize on the key holiday season with new product launches.

Threats

  1. Economic Sensitivity:
    • High-priced products make Apple vulnerable to reduced consumer spending in economic downturns.
  2. Intense Competition:
    • Competition from other tech giants like Samsung, Microsoft, and Google.
  3. Regulatory and Tax Risks:
    • Exposure to global regulatory scrutiny and tax challenges, as evidenced by the $10.2 billion one-time tax charge in 2024.
  4. Supply Chain Dependence:
    • Risks associated with reliance on global supply chains, including disruptions or geopolitical tensions.
  5. Limited Stock Upside:
    • Below-average upside potential projected over the long term, possibly impacting investor sentiment.

You said:

Did the SWOT analysis information come from this report or from other information in your library?

ChatGPT said:

ChatGPT

The SWOT analysis is based primarily on the uploaded report. Here’s a breakdown of where the information aligns:

Strengths

  • Market Leadership: Derived from the report, which highlights Apple’s dominance in key product categories and its strong brand recognition​.
  • Financial Stability: Data points like gross margins (74% for Services), cash position ($65.2 billion), and return on equity (170%-188%) are directly from the report​.
  • Innovation: Mentioned product launches (e.g., iPhone 16, Apple Watch Series 10) and the integration of Apple Intelligence are explicitly discussed in the report​.
  • Recurring Revenue: The growth in paid subscriptions (1 billion+ doubling in 4 years) is from the report​.
  • Stock Quality: Safety rank, market capitalization, and other quality metrics come directly from the report​.

Weaknesses

  • Dependence on Flagship Products: The report highlights the iPhone’s revenue contribution but does not explicitly label it a weakness; this was inferred.
  • High Valuation: The P/E ratio of 32.0 is directly mentioned as a factor​.
  • Profitability Challenges: The margin disparity between Services (74%) and Products (36.3%) is from the report​.
  • Declining Book Value: Historical decline was noted in the report’s financial trends​.

Opportunities

  • Growth in Services Division: Based on its profitability and rapid growth as described in the report​.
  • New Product Categories and Technology Integration: Apple Intelligence integration and product launches are highlighted in the report​.
  • Geographic and Market Expansion: This was inferred from Apple’s global business model, not directly stated in the report.
  • Holiday Season Sales: Explicitly mentioned as a key driver​.

Threats

  • Economic Sensitivity: This was inferred from the premium pricing of Apple products, which is a known factor for discretionary spending in economic downturns.
  • Intense Competition: Apple’s competitors are not directly named in the report but are part of general knowledge about the industry.
  • Regulatory and Tax Risks: The $10.2 billion tax charge in 2024 is from the report​.
  • Supply Chain Dependence: Not directly mentioned in the report but is a well-documented risk for Apple in general.

Where specific insights were not explicitly outlined in the report (e.g., competition, economic sensitivity), they were inferred based on standard industry and market knowledge. If you’d like a stricter analysis limited solely to the report’s content, let me know!

Noting the very low projected Annual Total Return of the industry report I submitted, I asked a follow up question and received a detailed answer in about ten seconds.

Please compare the 10-year Annual Total Return to the long-term projections in this report and analyze the main reasons for the difference. Will this difference impact investor sentiment going forward?

ChatGPT said:

ChatGPT

Comparison: 10-Year Annual Total Return vs. Long-Term Projections

  1. 10-Year Annual Total Return:
    • Over the past 10 years, Apple has delivered exceptional returns, including a 268.1% total return over the last 5 years, equating to an annualized return of approximately 53.6% over this period.
  2. Long-Term Projections (2027-2029):
    • The projected price gain over the next 3-5 years is +30% at best, with an annualized return of 7% under optimal conditions.

Analysis of the Difference

  1. **Maturing Growth Profile:
    • Apple’s earlier explosive growth stemmed from game-changing innovations like the iPhone and MacBook, which propelled revenue and stock performance. The company is now transitioning to a mature business phase, reflected in reduced revenue and earnings growth forecasts of around 9% annually​.
  2. Valuation Ceiling:
    • With a P/E ratio of 32.0, Apple is already priced at a premium. This high valuation limits room for multiple expansion, unlike earlier periods when its valuation was lower and expanded significantly as the company grew.
  3. Market Saturation:
    • Apple’s products dominate many global markets, and while Services provide new growth avenues, the pace of expansion is slower compared to the earlier adoption of its flagship products.
  4. Shifting Revenue Mix:
    • The Services division, with a gross margin of 74%, is growing faster than hardware. While positive for profitability, services growth does not deliver the same explosive top-line expansion that hardware launches historically provided.
  5. Macro-economic Factors:
    • Slowing global economic conditions and rising interest rates can impact discretionary spending on premium products, limiting growth potential.

Impact on Investor Sentiment

  1. Conservative Outlook:
    • Investors seeking high-growth opportunities might be discouraged by the relatively modest long-term projections. Apple’s limited upside potential (7% annualized return) might not justify its high valuation for growth-focused investors.
  2. Appeal to Conservative Investors:
    • Apple’s Safety Rank 1 and stable earnings make it appealing to conservative or income-focused investors who prioritize reliability over high returns.
  3. Shift to Income Focus:
    • With a dividend yield of 0.5%, dividends could become a more significant draw as revenue growth slows. Investors may expect management to focus more on capital returns through dividends or share buybacks.
  4. Sustained Confidence in Quality:
    • Apple’s brand, innovation, and strong financials (e.g., $65.2 billion in cash) will likely maintain investor confidence, even with reduced growth projections.
  5. Potential for Re-rating:
    • Any significant innovation (e.g., breakthroughs in AI or new product categories) could reignite growth expectations and provide upside surprises, keeping long-term investors interested.

Conclusion

The difference between historical returns and long-term projections reflects Apple’s transition to a mature growth phase. While this may temper sentiment among aggressive growth investors, Apple’s stability, profitability, and quality metrics should preserve its appeal to conservative investors. Future innovations and capital allocation strategies will play a key role in shaping investor sentiment going forward.

Bottom of Form

Bottom of Form

To summarize this experience:

AI can only analyze the content submitted for review. If the input is biased, so will the answer. In this case, the original report was from Value Line, a source I consider to be of better quality than reports from Humongous Bank & Broker (HB&B) on Wall Street, whose analysts are conflicted — caught between the sell-side and buy-side interests of the firm.

Anyone who lacks financial or technological experience can upload a PDF to chatGPT and give it a simple prompt like “Please analyze this detailed report and present the key investment information in point form.” ChatGPT will reply in seconds, which would take a competent financial advisor hours, perhaps days. Depending on the user’s financial sophistication, a deeper analysis can be requested, and in seconds, chatGPT will provide the answer.

Technology in the hands of the average investor is a game-changer. There is no longer a need to rely on HB&B for guidance; however, the AI user must understand that biased content submissions will result in biased answers from AI. Be aware that almost all financial information has a built-in bias because HB&B is the source. Moreover, if AI libraries are used, parts of the answers will contain mistakes as well as the usual biases.