Apple’s flagging AI hopes get revival from DeepSeek’s emergence

The outlook for AI and iPhones will be in focus with results due after market close. Bloomberg

Concerns over Apple Inc.’s first-quarter results have met with 11th-hour optimism that it could eventually benefit from the same force that recently wreaked havoc on the tech sector.

The emergence of Chinese artificial intelligence startup DeepSeek is seen as a positive for Apple as cheaper AI models could contribute to a long-anticipated — and so far unrealized — iPhone upgrade cycle and re-acceleration in growth. The outlook for AI and iPhones will be in focus with results due after market close.

DeepSeek’s AI showed strong results despite dramatically lower costs and fewer performance chips than other models. While this triggered a historic selloff in AI chipmaker Nvidia Corp., it’s seen as a potential boon to software companies and app makers. A proliferation of AI apps and services could be what makes consumers finally trade up for phones with AI capabilities.

“It seems like the cost of AI has just come down, which means we could be about to hit an S-curve of app innovation and AI adoption, and if that happens, the bull case for Apple writes itself,” said Andrew Choi, portfolio manager at Parnassus Investments. “The impact won’t be immediate, and we still need to see people upgrade, but the AI outlook is better than it was a week ago, when it seemed clear people weren’t trading up for Apple Intelligence.”

Having posted its best three-day gain since June, the stock is up 7.4% this week, well above the Nasdaq 100 Index’s week-to-date drop of 1.7%. However, Apple remains down 4.4% in 2025, lagging the tech-heavy index.

Apple rose 30% last year, in part because investors bet an AI iPhone would re-catalyze the company’s revenue growth, something that has recently been in short supply, especially relative to other megacap tech names. The company gave a disappointing forecast last quarter.

While investors looked past tepid initial demand, sentiment soured in the first weeks of January as China weakness and uncertainty regarding tariffs put Apple’s high multiple and low growth into sharp relief. Several firms have downgraded the stock this month, cementing Apple’s status as the least-loved megacap besides Tesla Inc.

The downgrades cited iPhone weakness and Apple’s valuation, which is elevated. Shares trade at almost 32 times estimated earnings, more than 50% above their 10-year average, while its multiple recently hit a record in terms of price-to-estimated sales.

The high multiple comes despite revenue growth being negative in five of the past eight quarters. While analysts expect revenue to grow 5.2% in its 2025 fiscal year, this is less than half the 12.2% pace expected for the overall tech sector, according to Bloomberg Intelligence.

David Volpe, deputy chief investment officer at Emerald Advisers, said it was “frustrating” to be underweight on Apple’s stock, given it has recently performed well despite the high valuation and the fact that AI isn’t yet translating to more robust growth.

“They’re waiting for others to spend and then they’ll benefit from building [AI] in their applications,” he said, acknowledging that unlike megacap peers, Apple wasn’t devoting heavy capex to AI infrastructure — spending that has recently come under scrutiny elsewhere. “I get that, but at the same time, show me the growth because I’m just not seeing it.”

So far any AI tailwind from DeepSeek looks more like optimism than anything concrete, and despite the stock’s pop, analysts aren’t boosting their estimates on Apple. The consensus for the company’s 2025 revenue and net earnings have both slipped over the past week, according to data compiled by Bloomberg.

However, many still consider Apple a haven stock, and it screens well on quality characteristics like the durability of its earnings, large recurring revenue from its massive user base, and the billions of dollars it spends on buybacks. The CBOE Apple VIX — which tracks estimated future volatility — is only modestly its long-term average level.

Choi at Parnassus owns the stock but is underweight relative to Apple’s weight within benchmarks.

“This is a stable business that is incredibly well run with a wide competitive moat and which has optionality to participate in a meaningful way with AI,” he said. “If we end up seeing killer AI apps, I think this valuation fits over the long term. Absent that, however, it is getting harder and harder to justify this price.”