Apple, lacking artificial intelligence, resembles Coca-Cola more than a high-growth tech company.

For the past twenty years, Apple Inc. has exemplified the potential of the stock market like no other company. Its evolution from a specialized computer manufacturer to the most valuable company in the world has solidified its shares as a crucial component of investment portfolios across the globe.

But in what seems like the blink of an eye, Apple’s shine begins to fade. Artificial intelligence is now the story of technology, and it is fueling the growth that the company previously relied on to sell its devices and services to eager consumers around the world.

This is where Apple is in trouble. Its revenue growth is stalling, and the stock is underperforming the Nasdaq 100 by about 16 percentage points, the most since 2013. The company continues to generate massive revenues, but whether it can continue to grow at the pace investors expect is an open question. Apple executives say they have big AI plans that they hope will help boost its sales. But for now, it is difficult to assess its prospects.

All of which has investors wondering if Apple’s AI dreams don’t materialize, what role will the stock play today?

“It’s become more of a value stock, a bit like Coca-Cola,” said Phil Blancato, managing director of Ladenburg Thalmann Asset Management and Osaic’s market strategist. “All the things you want will provide a defensive profile and market rate returns for the foreseeable future until they have a new catalyst.”

In fact, Apple is still the reliable money machine it always has been. Looking for a shareholder-friendly cash flow juggernaut? What about a safe harbor with a bulletproof balance sheet? It checks those boxes.

“If you’re a long-term investor who really likes solid, stable growth that’s very annuity, growing margins, better profitability and a business that generates significant amounts of cash and still has a lot of innovation, we think Apple is a great place to be,” said Jensen Investment Management portfolio manager Kevin Walkush.

But investors looking to buy into the next big growth market have turned their attention to artificial intelligence. Nvidia Corp. is taking Apple’s place at the top of technology because of seemingly insatiable demand for chips used in major language models.

Removal of assessment

Apple has fallen more than 10% this year, wiping out about $330 billion in market value and ceding its position as the world’s most valuable company to Microsoft Corp., whose inclusion of ChatGPT in products such as its Office software is starting to fuel revenue growth. Microsoft’s market cap is now nearly $3.1 trillion, compared to Apple’s $2.7 trillion. Nvidia, whose revenue and profits have soared in an arms race for AI computing power, is not far behind at $2.2 trillion.

The problem isn’t so much that Apple has suddenly stopped growing, it’s been happening for a while — its revenue shrank in every quarter of its last fiscal year, even as the stock was hitting record highs. The problem is that the company hasn’t shown anything with AI at a time when iPhone sales are slow and the company faces growing regulatory threats.

“We are going through an incredible wave of innovation,” said Mark Lehmann, CEO of Citizens JMP Securities. “The market will tell you that Apple has a lot to prove here, and so far they haven’t shown much.”

The notoriously secretive Apple has revealed little about its plans to include AI services in its products. CEO Tim Cook has promised that Apple will “break new ground” in artificial intelligence this year, and market insiders are expecting big news at the company’s annual software developer conference in a few months. However, many investors are losing patience and turning to stocks with a clearer path in AI.

At the heart of Apple’s woes is the loss of revenue growth, and it’s unclear what’s causing it. The company’s first major new product category in nearly a decade, Vision Pro headphones, isn’t expected to contribute significantly to growth for years. Apple recently ended its long effort to build an electric car. At the same time, iPhone revenue has stagnated and sales in China have declined due to a weak economy and increased competition.

Regulatory pressures

In addition to this, Apple faces increasing pressure from regulators. Earlier this month, the European Union fined Apple about $2 billion as it investigated allegations that Apple blocked competitors from streaming music on its platforms. In the US, the Justice Department appears close to lifting the antitrust case after five years of work alleging that Apple imposed software and hardware restrictions on iPhones and iPads to prevent competition from rivals.

Sales for 2023 fell 3% and are forecast to grow just 2% this year, according to data compiled by Bloomberg. By comparison, revenue is expected to grow by 33% in 2021. Meanwhile, Nvidia’s sales are projected to jump 79% and Microsoft’s by 15% during the companies’ current fiscal years.

For the past couple of years, Apple has been commanding Microsoft’s premium valuation. Two years ago, when tech stocks were hit hard, the stocks held up much better than others. But this is no longer the case. Apple’s pricing is around 25 times projected earnings over the next 12 months, up from around 30 times last summer. This is similar to Walmart Inc’s estimate. Microsoft’s price, on the other hand, is 32 times and Nvidia’s is 35 times.

However, Microsoft trading at an all-time high may provide a good example of Apple’s long-term potential. When Satya Nadella took over the company in 2014, it was a software maker with a 20th-century mindset and suffering stock. Now it’s everywhere, from the cloud to artificial intelligence, and its inventory is growing exponentially.

“Everybody has to reinvent themselves, and that just shows how fast the technology revolution is,” Citizens JMP’s Lehmann said. “Microsoft finally got going, but it took 15 years to figure it out.”

Of course, despite this year’s dismal performance, it’s easy to argue that Apple’s stock is poised for a rally and that it’s too early to count it out of the AI race. The company has more than $170 billion in cash on its balance sheet, and its net income is expected to exceed $100 billion this year. This gives Apple unparalleled resources to penetrate new markets and continue to return cash to shareholders through dividends and share buybacks.

“It’s hard not to compare what’s hot right now,” Jensen Investment Management’s Walkush said. “If you removed the artificial intelligence and the sensational image right now, would people look at Apple differently? I think they would.”