Artificial intelligence (AI) is one of the biggest drivers of the current bull market.
In the 18 months since OpenAI released ChatGPT on November 30, 2022, S&P 500 AI Trends generated a total return of 33%. Microsoft, NVIDIA (NASDAQ: NVDA), alphabet (Nasdaq: GOOG) (Nasdaq: GOOGL)and virtually every other major technology company around the world, are also leveraging AI. There's no doubt that AI development has come a long way in a relatively short space of time.
One company has been keeping quiet about its efforts, but executives have promised to “break new ground” in generative AI this year — and a groundbreaking announcement could come within just a few weeks.
apple (Nasdaq: AAPL) The company is set to announce more about its AI developments and partnerships at its annual Worldwide Developers Conference (WWDC), which starts on June 10. Here's what investors can expect and what it could mean for the company's stock price.
Apple's AI ambitions differ from other big tech companies
A core part of the Apple brand is its focus on data privacy and security, which highlights the fact that most of the company's AI features also work on personal devices.
Bloomberg's Mark Gurman reports that Apple has built its own large-scale language model that will enable features like summarizing missed notifications, providing synopses of news articles, transcribing voice notes, and improving existing features like calendar autofill, app suggestions, and photo editing.
None of these features are particularly groundbreaking on their own, but the prospect of even more on-device AI features in the future as Apple improves LLM may be a bigger talking point. As AI features play an ever-increasing role in our digital lives, the ability to keep data private and secure through on-device processing could be the next big advancement in AI, with Apple leading the way.
But Apple also sees a big demand for AI capabilities that current on-device features can't necessarily provide, so it has partnered with OpenAI to integrate some of its technology into upcoming versions of iOS, and is in talks with Google about using the Gemini model, though no agreement has been reached yet.
Apple's secret weapon in the race to catch up with AI
One of the biggest limiting factors in the development of AI technology is the need for computing power. Nvidia has a monopoly on the high-end GPU market and can't manufacture chips fast enough to keep up with demand. This is great for Nvidia's bottom line, but it's prohibitively expensive for the big tech companies that build data centers full of Nvidia GPU clusters.
Nearly all of the big tech companies that currently use Nvidia chips in their AI data centers, including Microsoft and Alphabet, are developing their own chips for training large-scale language models, but cutting-edge chips are difficult to develop and take a long time to manufacture.
Apple uses its own chips for its AI data centers, which saves it money and reduces potential bottlenecks that other big tech companies may encounter when sourcing Nvidia chips and manufacturing them themselves. Apple currently uses the M2 Ultra chips found in its Mac Pro computers for its data centers. Next year, it may switch to the M4 chip found in the latest version of the iPad Pro, released earlier this month. Its existing manufacturing relationships allow it to build out data centers very quickly and cost-effectively as it ramps up its AI efforts.
The fact that Apple is using the same chips it uses in its own devices to train the LLM also bodes well for the future of in-device AI capabilities in Apple products.
What it means for investors
It's unlikely that Apple will directly monetize many of the new AI features. Rather, the new features may encourage a large portion of Apple's 2.2 billion users to upgrade their devices. On-device AI features may only be available on the latest hardware, which could encourage users to boost device storage for AI-edited photos and videos.
Most iPhones in use in the U.S. are more than two years old, and about a third of users have had theirs for more than three years. Those devices are ripe for an upgrade, especially if Apple gives iPhone owners a little nudge. That could boost sales in fiscal 2025, which starts in October. New iPhone models typically hit stores in September.
Meanwhile, the iPhone's built-in advanced AI capabilities could pave the way for developers to create new AI-powered apps. Apple could benefit from building what analyst Dan Ives calls an “AI App Store.” AI-enabled features such as Circle Search on Google's Pixel phones could drive more traffic to its search engine. And if that happens, Apple's services revenue could increase significantly. According to court documents, Apple receives 36% of Google's search revenue on iPhones, Macs and iPads.
AI could drive revenue for the two biggest segments of Apple's business in fiscal 2025. Next month's announcement may just be the beginning.
With shares once again approaching all-time highs, the stock still looks attractive, and while a forward price-to-earnings ratio approaching 30 may make it less appealing to some, the stock's significant share repurchase program, existing net cash position, and long-term outlook for continued strong earnings growth next year and beyond justify the premium price.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. Adam Levy has invested in Alphabet, Apple, and Microsoft. The Motley Fool has invested in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The one stock to buy before it breaks new ground in artificial intelligence (AI) next month was originally published by The Motley Fool.
