Apple, the company that introduced Siri as the first widely used virtual assistant with the iPhone 4 in 2011, has seen its early lead in artificial intelligence (AI) diminish over the years. Siri, which started as a groundbreaking innovation, eventually became more of a novelty, as competitors like Alphabet (NASDAQ: GOOGL), OpenAI, and Microsoft (NASDAQ: MSFT) surged ahead in the AI race. By 2024, Apple faced significant embarrassment, with reports indicating the company was seeking to license AI technology from other firms to integrate into its new iPhone 16.
Turning this challenge into an opportunity, Apple showcased its resilience at the 2024 World Wide Developers Conference (WWDC). The company announced the launch of “Apple Intelligence,” a robust AI product aimed at revitalizing its device ecosystem. This new offering integrates OpenAI’s ChatGPT-4o large language model with Siri, enhancing the virtual assistant’s capabilities and introducing advanced “command/control functionality.” Morgan Stanley analyst Erik Woodring described this as a move to position Apple as providing “the most differentiated consumer digital agent,” and predicted it would encourage iPhone users to upgrade their devices to benefit from the new AI features.
Despite the optimistic reception of this announcement, Woodring maintained a conservative price target for Apple stock at $216. While acknowledging that the WWDC announcement slightly exceeded expectations, he suggested that it was not yet transformative enough to warrant a higher valuation. Nevertheless, he continued to rate the stock as Overweight (Buy), reflecting confidence in Apple’s long-term growth prospects.
A significant aspect of the new Apple Intelligence is its hardware requirement. The AI features will only be available on devices equipped with an Apple A17 Pro or M1 chip. While 80% of Apple Mac computers have this capability, only 52% of iPads and just 5% of iPhones are currently equipped to support Apple Intelligence. This creates a substantial incentive for consumers to upgrade their iPhones, a critical factor for driving Apple’s revenue and profit growth.
Woodring provided a financial perspective on the potential impact of these upgrades. He estimated that Apple users typically upgrade their devices every 4.8 years. By shortening this upgrade cycle by just 0.1 years, Apple could see an additional 5 million iPhone sales annually, increasing its per-share earnings by about $0.10. Thus, the introduction of AI features serves as a strategic move to accelerate the upgrade cycle, boosting sales and profitability.
Initially, Apple Intelligence will be available only to English-speaking users, who constitute over 30% of the iPhone user base. However, Apple plans to expand the AI’s language capabilities over time, potentially tripling the addressable market for this product and further accelerating the upgrade cycle.
The consensus among analysts regarding Apple’s prospects remains positive. The stock enjoys a Moderate Buy consensus rating, with 22 Buy recommendations, 11 Holds, and a single Sell. Despite this, the average price target of $208.47 indicates that the shares may remain rangebound in the short term.
The broader context of Apple’s AI push highlights a strategic shift to regain its competitive edge in the tech industry. The integration of advanced AI capabilities into its devices represents a significant step forward, not just for enhancing user experience but also for driving substantial economic benefits. This initiative is likely to spur a new wave of innovation across Apple’s product lines, from iPhones to MacBooks, creating a more compelling value proposition for consumers.
Moreover, the implications of Apple’s AI strategy extend beyond consumer electronics. AI has the potential to revolutionize various sectors, including healthcare, finance, and education, where Apple’s devices and software already have a strong presence. By leveraging AI, Apple can enhance the functionality and appeal of its products, making them indispensable tools for both personal and professional use.
In summary, Apple’s brief reascension as the world’s most valuable company underscores the profound impact of AI on the technology industry. The company’s comprehensive AI strategy, revealed at the WWDC, has not only reignited investor interest but also set the stage for transformative changes in its product offerings. This development highlights the ongoing competition among tech giants to harness AI for market leadership and innovation, shaping the future of technology in the process. As Apple continues to expand its AI capabilities, it is poised to drive significant growth and maintain its position at the forefront of the tech industry.