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Apple (AAPL) could use a new blockbuster product, and it could come as soon as this summer.
The iPhone maker saw sales rise just 2% last quarter after a year in which revenue fell 2.8%. China remains a big question mark for Apple following a government ban of iPhones and a report indicating a massive decline in sales in the country to start the year. Meanwhile, the varying sources of its high-margin services revenue remain the focus of regulators around the world.
But at least two Wall Street analysts think Apple will release the next product to set off a spurt of growth at the massive company this summer. Melius Research analysts Ben Reitzes and Nick Monroe think investors should focus on what Apple will announce this summer at its annual Worldwide Developers Conference (WWDC).
Apple could “break new ground”
At Apple's annual shareholder meeting, CEO Tim Cook promised investors the company will “break new ground” on generative AI this year.
The claim follows comments the executive made during Apple's first-quarter earnings call. Cook said, “We continue to spend a tremendous amount of time and effort” on AI, and “I think there's a huge opportunity for Apple with GenAI.”
Apple recently shuttered its electric car development to focus more on the generative AI projects it's working on. Bloomberg previously reported the company is spending more than $1 billion per year on generative AI. But true to form, Apple hasn't talked much about what it's working on publicly before it's ready to announce a product set for release.
That's coming this year, Cook says, and very likely planned for WWDC in June.
“To us, it is the most important launch since the iPhone,” Reitzes and Monroe wrote in a note to investors. They see new AI features as a catalyst for a new iPhone supercycle next year as iPhone users upgrade their hardware to take advantage of new AI capabilities.
Apple's unique position in artificial intelligence
While most AI companies are focused on either the hardware (semiconductors) or the software (large language models and applications), Apple, as always, is focused on the combination of the two. That could allow it to leapfrog competitors and push more AI capabilities to consumers.
Apple builds some of the most advanced mobile processors on the market for the iPhone. A few years ago, it expanded its designs to its Mac lineup, and it now makes some very powerful chips for desktops and laptops as well. While these chips aren't going to power large language model training, which is mostly handled by remote servers full of GPUs, they may be exactly what's needed for on-device, or “edge,” AI applications.
In other words, new Apple devices may be capable of implementing generative AI all while keeping data securely on a device. That opens the door for a lot more applications and use cases. And Apple could develop software that uses its large language model in a way that takes advantage of its capabilities.
The big advantage for Apple in monetizing AI
Another factor that separates Apple from the pack of big tech companies all developing products and services around generative AI is that Apple has multiple ways of monetizing its advancements in AI.
Apple has historically made the bulk of its revenue from hardware sales. As Reitzes and Monroe mention in their note, AI advances could push more users to upgrade their iPhones. With over 2.2 billion active devices in use, it could sell a lot of iPhones just by convincing users to upgrade.
More recently, Apple has focused on growing its services revenue, which leverages that massive user base. Apple could offer a subscription service that gives users more AI features. It could integrate it into its other subscription services like Apple Music and Apple News, or bundle it as part of its Apple One subscription.
Apple could also give developers access to its AI models and other tools. That could be monetized through licensing revenue, or as analyst Dan Ives suggests, an “AI app store.”
The key differentiator for Apple is that it owns the platform, and it has several ways to monetize the user base on that platform. While shares currently trade for about 26x forward earnings, that valuation also takes into account Apple's massive cash position and its capital return program. If Apple's AI development proves to be its next big product, it could result in its price-to-earnings multiple expanding as revenue and profit growth reaccelerate.
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