Third Point is betting big on Apple. But the benefits from artificial intelligence are a major reason, according to the hedge fund firm’s second-quarter letter, seen by Institutional Investor.
The multistrategy hedge fund headed by Dan Loeb told investors it established a position in the maker of iPads and iPhones in April.
“Despite Apple’s dominance as a business, its stock had become increasingly ‘underowned’ by institutional investors and its relative multiple had compressed toward a multiyear low,” Loeb said in the letter. “We believe that this was due to several years of stagnant earnings growth, exacerbated by more recent fears that Apple may turn out to be an AI loser. Our research led us to a different conclusion: We believe AI-related demand could drive a step change improvement in Apple’s revenue and earnings over the next few years.”
Apple was Third Point’s seventh-largest U.S.-listed long as of the end of June, according to the second-quarter 13F regulatory filing. It is not known whether the hedge fund firm has added to its position since then. Shares of Apple closed Friday at $226.84. They are up about 18 percent year-to-date and nearly 38 percent since bottoming out around mid-April.
Third Point was up 10.9 percent for the year through July, compared with 16.7 percent for the S&P 500, including dividends reinvested.
In the letter, Loeb asserted that Apple’s recently announced “Apple Intelligence” suite for AI-enabled smartphones “will start driving meaningful new demand” within Apple’s installed base, resulting in accelerating revenue growth on two fronts.
For one: Loeb predicts iPhone revenue will see “a marked improvement” because Apple Intelligence features will not be backward-compatible with existing iPhone models, “creating the conditions for a forced upgrade cycle.” Second, Loeb says, Apple’s app store will likely become the primary distribution platform for most new consumer-focused AI apps such as OpenAI’s ChatGPT, with which Apple recently announced a partnership.
“We expect Apple’s claim on the future economics of these apps to be substantial as it exploits its distribution advantage,” he explained, adding that that edge stems “first and foremost” from an unparalleled app ecosystem, which Loeb claimed “would be virtually impossible for any competing new technology platform to replicate given the powerful two-sided network effects linking app developers and app users.” He also noted that Apple has AI-specific product advantages thanks to years of work on proprietary silicon and data privacy.
“These advantages will be critical to the commercialization of an AI-enabled virtual assistant, which we believe may emerge as the first ‘killer app’ for consumer-focused AI,” Loeb said. “And while we know little about the eventual capabilities and reach of this new offering, we believe the emergence of an AI layer on iOS will increasingly augment consumers’ own agencies with those of the iPhone’s AI features.”
If Apple can seize this opportunity, he said, “the monetization form factors will follow and have the potential to increase Apple’s earnings meaningfully. This would nsot only be a sharp departure from the past several years of stagnant earnings growth, but also a direct repudiation of the consensus bear case.”
So Loeb believes that despite the stock’s recent strong appreciation, there is room for “significant upside ahead” as the magnitude of this new AI opportunity is realized.