The artificial intelligence buzz across the tech world has increased over the past year. All the big players are competing with each other to grab a piece of this booming market. Nevertheless, one tech giant is seemingly on the limp in this race for dominance, or at least that's the image it wants to portray. Apple Inc. (AAPL, Financial) has always stepped up the game by boosting innovation and enhancing the user experience. But with AI, the tech giant has been maintaining a discrete profile for a long time.
It is beyond doubt that AI is here to revolutionize the tech landscape, a sort of renaissance if one thinks of it. PwC estimates AI will contribute a staggering $15.7 trillion to the global economy by 2030. Given these rosy projections, Apple's toned-down approach toward the technology has raised speculations about whether it is missing out on the AI hype or playing its cards in silence to take the market by surprise.
The current state of affairs
Despite recent financial struggles, including a major revenue slump since the first quarter of fiscal 2023, Apple saw a nearly 50% spike last year, though it lagged other tech giants such as Nvidia Corp. (NVDA, Financial) and Amazon.com Inc. (AMZN, Financial). The company had a challenging start to 2024 with shares tumbling amid a series of analyst downgrades and was dethroned by Microsoft Corp. (MSFT, Financial) as the most valuable company in the world. Some critics have blamed Apple for not having a clear AI strategy unlike its competitors, such as Microsoft and Alphabet Inc. (GOOG, Financial), which are aggressively investing in the technology.
When it comes to AI (or machine learning, as Apple prefers to say), the company is not new to integrating such features into its devices. It has revolutionized many features using machine learning, including Siri, facial recognition and personalized recommendations. However, in the current landscape, compared to other tech giants, Apple has taken a more cautious approach to introducing and announcing AI features and investments. Apple is making calculated moves in the AI space behind the scenes. The company has acquired several AI start-ups in the past decade and is partnering with universities and research institutions to collaborate on projects.
Research and development spending is one of the key indicators to measure a company's commitment to introducing new features and advancements into its business strategy, especially for tech companies. Apple's R&D spending was roughly 7% of its revenue for 2022. In comparison, in the same year, Google and Microsoft allocated nearly double for R&D and Meta's (META, Financial) spending was more than four times Apple's. According to the 2023 Industrial R&D Investment Scoreboard by the European Commission, Apple ranks in fourth place, above Asian rivals Huawei (fifth) and Samsung (XKRX:005930, Financial) (seventh). However, the company ranks below Alphabet, Meta and Microsoft (first three places). While this spending disparity could be highlighting a difference in priorities, it is easy to overlook Apple's strategy of acquiring resources in other areas to step up innovation.
Google-Apple alliance: A double-edged sword
Recent reports suggest Apple could enter an AI partnership with Alphabet's Google. As per Bloomberg, Apple is negotiating with the Google parent company to license its state-of-the-art AI model, Gemini. If the deal goes through, Apple might integrate Gemini's AI features into its upcoming operating systems for devices. The possibility of this partnership raises many questions about the company's long-standing tradition of prioritizing in-house development and tight control over its technology.
Google and Apple have been in a strategic partnership for a long while and it has proven to be a profitable one. Currently, Google is the default search engine for Apple's Safari browser, and to secure this position Google is reportedly paying around $18 billion annually to Apple. Therefore, Google's AI model Gemini seems like a natural choice for Apple. However, other than the obvious contradiction of the iPhone maker's privacy-first policy, this deal might raise many other concerns, including legal challenges and reduced quality in the user experience.
Currently, tech giants are facing scrutiny around the world, especially from the U.S. government and European Union. Recently, the U.S. Department of Justice filed an antitrust lawsuit against Apple for its alleged monopoly on the smartphone market and unfair treatment of developers through its App Store system. Partnering with another major tech firm and a rival might fuel the current controversy and could attract more legal scrutiny. Moreover, if Apple begins to rely on Google for AI tools, it could stifle competition and reduce consumer choices in the future for potential AI feature upgrades. Google's AI is a cloud-based system that allows developers to use consumer data to strengthen the LLM to become more efficient, which means the privacy of the user data will not be assured. This means more red flags for Apple.
The current regulatory scrutiny is already hampering Apple's operations. The potential delay in winning the lawsuit and the restrictions that may be imposed by the government could hinder the company's efforts in the AI field. Additionally, the financial burden of a lawsuit could put a halt on the company's ability to find an internal AI solution. Moreover, a well-defined and transparent data protection framework should be put into practice before entering into a partnership with Google, if at all.
Apple's AI master plan
Even though Apple is not vocal about its advancements with AI efforts, several ongoing projects are making progress. News surrounding the company's own AI model has garnered substantial traction. According to sources, Apple has reportedly developed a large language model called Ajax GPT, with a performing capacity exceeding GPT 3.5. Also, it may be working on an AI-powered chatbot dubbed Apple GPT.
Apple might have been suspiciously quiet about AI in product launches. However, it has acquired the greatest number of startups among all tech giants since 2017. The company is likely to have spent around $1 billion in acquiring various AI ventures. In 2023 alone, Apple reportedly bought more than 30 AI ventures. These acquisitions take place mostly to cover various specialties such as self-driving technology, voice design, music generation and image recognition, but sometimes to even acquire the talented individuals behind these startups.
The latest and most important addition to Apple's AI arsenal is DarwinAI. Acquiring DarwinAI can be seen as an investment in technology as well as personnel, particularly specialists in machine learning and AI from the University of Waterloo. A prominent figure in the AI community and former director at the University of Waterloo, Alexander Wang, is currently appointed as a director at Apple, leading the company's AI efforts in Canada. Also, DarwinAI's synthesis model is expected to help Apple's most ambitious AI capability; on-device AI (also referred to as Edge AI) with plans to move forward with generative AI programs in the future.
Two recent theses published by Apple have shown the company's effectiveness in incorporating advanced levels of AI within the pre-existing ecosystem. One research paper in collaboration with the Swiss Federal Institute of Technology Lausanne delves into the development of the MM1 generative AI model. The results of the thesis demonstrate Apple's capabilities in developing cutting-edge AI architectures, particularly multimodal learning, which combines images with text data.
Another paper published showcases the successful execution of large language models in natural language processing, delivering exceptional performance in various tasks with limited memory. The methods used in the thesis collectively enable running models up to twice the size of the available DRAM, with a four to 25 times increase in inference speed compared to other approaches in CPU and GPU. Ultimately, this research paves the way for effective inference of LLMs on devices with limited memory to deliver exceptionally faster performance.
Both these research papers and recent acquisitions indicate Apple is on the right track to offering on-device AI capabilities that will far exceed what is currently available in the market.
Usability focus is Apple's product strategy
Voice Assistant, Facial Recognition, Photo optimization, Personalized recommendations, Animoji and Fitness tracking may look like functions that have nothing to do with AI, but all these features are fundamentally built upon various machine learning technologies. Apple was the pioneering tech brand that managed to integrate these features seamlessly into mobile devices successfully. Today, it is working behind the scenes to improve these features by integrating AI.
When Siri, the voice assistant, was released, it was received remarkably well across the globe. But soon after the initial product launch, because of Siri's inability to complete slightly advanced tasks, its credibility declined. Following many internal conflicts faced by Apple's Siri team with engineers frustrated by a lack of tools and data to improve it, the chat bot has started lagging behind its competitors. Meanwhile, Google Assistant, with its superior natural language processing and ability to handle complex queries, and Amazon Alexa, with its vast compatible ecosystem, are gaining momentum.
With the new on-device AI integration, Apple may have reversed the future of Siri and also could enhance the performance of Apple fitness trackers. The Apple Watch already integrates AI features to enhance fitness tracking. For example, the watch uses machine learning to identify workout types and analyze heart rate data, helping to offer more personalized coaching assistance. However, some competitors offer more advanced AI-powered health monitoring features, including blood pressure monitoring.
Keeping up with its brand of prioritizing the user experience more than anything else, Apple has made its first direct AI-related product with the new MacBook Air with an M3 chip highlighting its capabilities for AI tasks. This can be seen as a major breakthrough in Apple's AI strategy, promising its customers not a cloud-based AI service, but an on-device AI experience that upholds user privacy.
Apple follows a pattern of announcing new features as they are coming to the market. Therefore, the upcoming Apple Worldwide Developers Conference in June may bring potential AI-related announcements. Speculations suggest AI features will be integrated into the new Mac OS as well as iOS 18. The speculations are further strengthened with Apple acknowledging the term “AI” in its latest quarterly earnings transcript, deviating from its usual terminology. Moreover, CEO Tim Cook has confirmed the introduction of generative AI software in Apple products later in the year.
Additionally, the introduction of AI-integrated hardware such as Edge AI is expected to have a positive impact on the iPhone upgrade cycle. With the current upcycle period standing at a record high of 4.5 years, users upgrading their mobiles for a better AI-powered user experience will boost new hardware sales. This is crucial for Apple amid four straight quarters of sales declines and the dampening sales numbers in China. Analysts such as Dan Ives and Ben Reitzes believe that with AI integration, Apple will experience another supercycle in smartphone upgrades.
Apple's AI gamble - Missing out or playing the long game?
Apple may not be as aggressively discussing its AI plans compared to other tech giants, but the company is making steady progress behind the scenes. The company's on-device AI integration strategy may prove to be the differentiator in the future. At a forward price-earnings ratio of 26, the stock is valued at a premium to the five-year average of 24. This premium may seem unjustifiable at first, but if the company's on-device AI strategy succeeds, a potential iPhone upgrade supercycle will help it book stellar revenue and earnings growth in the coming years. Apple is certainly not missing out on AI despite not joining the hype publicly, yet. Contrarian investors may want to build a position in Apple to potentially benefit from a surprise AI announcement in the coming months.
