Artificial intelligence (AI) has been one of the main drivers of the current bull market.
In the 18 months since OpenAI released ChatGPT on November 30, 2022, the S&P500 produced a total return of 33%. The AI trend has been fueled by announcements of Microsoft, Nvidia (NASDAQ:NVDA), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), and virtually every other major tech company in the world. There is no doubt that the development of AI has advanced significantly in a relatively short period of time.
One company has remained relatively quiet about its work, but management has promised to “innovate” in generative AI this year. And these groundbreaking announcements could come in just a few weeks.
Apple (NASDAQ:AAPL) is set to unveil its AI development and partnerships at its annual Worldwide Developers Conference (WWDC), which begins June 10. Here’s what investors can expect and what it means for the stock.
Apple’s AI ambitions are different from the rest of big tech
Data privacy and security are at the heart of the Apple brand. As such, it will highlight the fact that most of its AI features will work on your personal devices.
Apple has built its own extensive language model capable of features like summarizing missed notifications, providing a summary of a news article, or transcribing voice memos, according to a report from Bloomberg’s Mark Gurman. It will also improve existing features like autofilling your calendar, suggesting apps, and editing photos.
None of these features are particularly revolutionary on their own. But the promise of more AI capabilities on devices as Apple improves its LLM might be the bigger story. As AI capabilities play an increasingly important role in our digital lives, the ability to maintain data privacy and security through on-device processing could be the next big breakthrough in AI, with Apple in the lead.
In the meantime, however, Apple knows there is huge demand for AI features that it can’t necessarily deliver with its current on-device capabilities. As such, it has entered into a partnership agreement with OpenAI to integrate some of its technology into the next iteration of iOS. Discussions have also taken place with Google to use its Gemini model, but they have not yet reached an agreement.
Apple’s secret weapon in its race to catch up on AI
One of the main limiting factors in the development of AI technology is the need for computing power. Nvidia has a stranglehold on the high-end GPU market and can’t make chips fast enough to meet demand. While this is great for Nvidia’s bottom line, it makes it extremely expensive for big tech companies to build data centers full of Nvidia GPU clusters.
Nearly all major tech companies currently using Nvidia chips for their AI data centers are developing their own chips to train large language models, including Microsoft and Alphabet. But developing cutting-edge chips is difficult and making them takes a long time.
Apple uses its own chips in its AI data centers, saving it money and reducing the risk of bottlenecks that other big tech companies might encounter when purchasing chips Nvidia and print their own. Apple currently uses the M2 Ultra chips found in the Mac Pro computer for its data centers. Next year, it could move to the M4 chips found in the latest version of the iPad Pro released earlier this month. Its existing manufacturing relationships allow it to be very fast and cost-effective in building data centers as it ramps up its AI efforts.
The fact that it uses the same chips to train its LLM that it uses in its devices also holds promise for the future of on-device AI capabilities for Apple products.
What this means for investors
Apple is unlikely to directly monetize many of its new AI features. Instead, the new features could push a large portion of Apple’s 2.2 billion users to upgrade their devices. On-device AI capabilities may only be available on the newest hardware and may encourage more on-device storage for all those AI-edited photos and videos.
The majority of iPhones used in the United States are more than two years old, and about a third of users have had their phones for three years or more. These devices are ripe for an upgrade, especially if Apple gives iPhone owners a little boost. That could lead to higher sales for fiscal 2025, which begins in October. New iPhone models are usually released in September.
Meanwhile, the advanced AI capabilities built into the iPhone could open the door for developers to create new AI-based apps. Apple could capitalize by creating what analyst Dan Ives calls an “AI App Store.” AI-powered features, such as the circular search found on Google’s Pixel phones, could drive more traffic to search engines. And Apple could see a nice increase in its services revenue if that were the case. Court documents revealed that Apple received a 36% cut of all Google search revenue on iPhones, Macs and iPads.
AI could power sales in the two largest segments of Apple’s business in fiscal 2025. Next month’s announcements could be just the start.
Even though shares are nearing their all-time highs again, the stock still looks attractive. Its forward price-to-earnings ratio near 30 could limit its appeal for some, but a higher price is justified due to its massive share buyback program, its existing net cash position and the long-term prospects of ‘another period of strong profit growth. next year and beyond.
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1 Stock to Buy Before Innovating in Artificial Intelligence (AI) Next Month was originally published by The Motley Fool
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