How AI Can Drive Apple Stock

AAPL stock (NASDAQ:AAPL) has been the underperformer compared to its Big Tech counterparts, increasing by only 1% over the last 12 months, whereas Nvidia has risen by 40%, Amazon by 30%, and Google by 20%. The disparity is not related to hardware or services. iPhone sales have exceeded expectations, driven by customer anticipation of potential tariff-related price increases, while the services sector continues to flourish. The shortfall primarily seems to stem from AI and concerns regarding Apple’s performance in this area.

Apple’s Early AI Stumble

Last year, Apple introduced its Apple Intelligence suite on iPhones, iPads, and Macs, providing features like writing assistance, enhanced calculator tools, and image generation. Although the launch appeared impressive in some areas, it has not met expectations. Furthermore, Apple’s significant developer event in June presented few compelling new AI advancements. The much-anticipated, more “personal” Siri upgrade was expected to perform practical tasks like retrieving information from emails and messages to schedule reservations, but seems to have been postponed indefinitely.

This misstep has intensified the perception that Apple is falling behind competitors at a time when AI has become a pivotal battleground for Big Tech. In theory, Apple should be well-situated for the AI age. With a vast installed base of approximately 2.4 billion devices, extensive semiconductor design expertise, and robust on-device AI capabilities, the company possesses the necessary components to create an engaging AI experience. However, what will it take for Apple to successfully develop compelling AI tools?

Apple’s Approach

Google’s newly launched Pixel 10 devices this week are equipped with remarkable AI features, including real-time translation with voice cloning, an AI-guided camera assistant, and a more proactive, context-aware assistant. These enhancements reflect the company’s substantial investments in AI. Its parent company Alphabet plans to spend around $85 billion on capital expenditures this year, with a considerable portion directed toward AI data centers, which are essential for large-scale model training and deployment. That averages over $20 billion each quarter.

In comparison, Apple allocated only $3.46 billion on capital expenditures last quarter. However, Apple may not require the same level of spending as Google. Its strategy heavily focuses on on-device intelligence, allowing advanced AI tasks to operate locally on iPhones, iPads, and Macs. This also emphasizes the divergence in their business approaches: Apple utilizes AI primarily to enhance hardware upgrades and fortify its ecosystem, whereas Google incorporates AI as a foundational element of its cloud services and advertising. Should you buy or fear Apple stock?

The Case For Big AI Acquisition

Nevertheless, Apple may need to undertake a bold action. The iPhone manufacturer has been slower to attract the type of elite AI talent that competitors like Google, Microsoft, and OpenAI have aggressively sought. That’s why a significant acquisition could be crucial – it would bring in products, technology, and talent, quickly altering the perception of Apple’s AI business. Apple’s largest acquisition to date was Beats for around $3 billion in 2014, which is a stark contrast to the scale of acquisitions that may be necessary today. However, with over $100 billion in cash available, Apple can comfortably manage it.

Several candidates have surfaced, including Perplexity AI, whose conversational search capabilities could revolutionize Siri and potentially advance Apple in the search market. Mistral AI, another organization specializing in lightweight on-device generative models, aligns with Apple’s hardware-first focus. Anthropic, recognized for its Claude chatbot, could position Apple at the forefront of the AI market, competing with entities like ChatGPT as it develops advanced AI models.

How AI Can Drive Apple Stock

AI could emerge as a pivotal catalyst for Apple’s stock. On the hardware front, Apple Intelligence is currently restricted to the newest iPhone 16 and 16 Pro models (plus last year’s 15 Pro), encompassing significantly less than 20% of the installed base. As Apple unveils more compelling AI, it is quite probable that these features will be limited to its latest devices. This could prompt a substantial upgrade cycle at a time when customers are retaining devices for extended periods. On the services side, revenues have already surged to nearly $100 billion a year, with over 1 billion paid subscriptions, making services Apple’s most rapidly growing segment. See our breakdown of Apple’s services business revenues.

Integrating AI into its ecosystem could unlock new premium features, increase storage demands, and generate more recurring revenues from subscriptions. Unlike competitors investing billions in AI infrastructure, Apple can leverage its advantage in on-device processing, effectively transferring compute costs to users through upgrades in hardware and cloud services. Advancements in AI could drive higher sales in hardware and services growth, potentially leading to a reevaluation of Apple stock.

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