Apple's Success Depends on Embracing Artificial Intelligence
Apple's Success Depends on Embracing Artificial Intelligence
Investors tracking Apple (AAPL 1.88%) are aware that its recent fiscal fourth-quarter results were merely average. Even though sales and operating income both increased year over year, and the company surpassed Wall Street's earnings predictions for revenue and earnings per share, its actual development was minimal. The company's guidance for the current quarter also fell short of expectations, causing shares to drop instead of rise.
However, there's an essential takeaway from the numbers and post-earnings discussion that can't be overlooked: Apple's fortune hinges heavily on the success of its consumer-oriented AI platform, named Apple Intelligence. If this platform fails to succeed, Apple's phase of subpar growth might persist.
A Slow Start for iPhones with AI Capabilities
Apple's revenue for the September quarter was $94.9 billion, surpassing the $89.5 billion from the previous year and surpassing analysts' predictions of $94.6 billion. Although profits slipped from $1.46 per share in the comparable quarter of the previous year to only $0.97 per share this time, the decrease was due to a one-time tax payment. Adjusted earnings per share, however, were still better than expected at $1.64.
Interestingly, iPhone revenue increased only 5.5% last quarter, despite the impending October release of Apple Intelligence, requiring the newer iPhone 15 or 16 for operation. Both smartphones were available during the quarter in question, with the latter released in late September and the former launched in September 2023. There was just not enough demand.
This wasn't an exceptional start to Apple's AI efforts.
And yes, this is crucial, perhaps more than you might imagine.
The iPhone tends to account for around half of Apple's revenue. If Apple's iPhone business is performing well, it's primarily due to the iPhone. If the iPhone business is stagnant, then Apple is likely to be stagnant as well. And here's the catch: Since early 2022, Apple's iPhone business has not shown any significant growth in revenue or unit sales. Similarly, the company's total revenue has not grown either, with sales growth for Macs and iPads tapering off. The only division showing any real long-term growth is its services division, but that's not sufficient to drive overall growth.
Don't expect a significant improvement soon. CEO Tim Cook mentioned during the fiscal fourth-quarter earnings call that Apple is only targeting "low- to mid-single-digit" top-line growth for the current quarter. The holiday quarter is usually robust for smartphones, but that's not expected to be the case this year.
Demand for iPhones remains low compared to the pre-2022 period, and Apple Intelligence may be the only factor that could rekindle demand. So far, however, it has not had much of an impact.
Generative AI Will Not Be a Magic Solution for Apple
Never say never. According to technology market research firm IDC, sales of smartphones capable of handling generative AI, such as the iPhone 15 and 16, are projected to reach 234.2 million units this year and 912 million in 2028, accounting for 70% of the smartphone market. This trend will definitely be beneficial for Apple.
However, it will also benefit other AI-ready smartphone manufacturers.
Consider Samsung's Galaxy S24 and Google's Pixel 8 as examples. The former utilizes Qualcomm's Snapdragon 8 processor, which is designed to handle heavy artificial intelligence tasks. The Pixel 8 utilizes Google's own Tensor G3 chip, which was also created to operate onboard AI.
Alternatively, consumers may opt to offload the heavy lifting of generative AI tasks to the cloud. Microsoft's CoPilot, for instance, is a portable artificial intelligence platform that works on most smartphones, but can continue where the user left off on a personal computer.
There's also the possibility that -- while still game-changing -- generative artificial intelligence may not be as game-changing as previously predicted.
That's a view shared by technology market research firm and consultancy Gartner. In its Hype Cycle for Emerging Technologies report, published in July, the firm stated that generative AI has now entered its "trough of disillusionment" stage, where the world realizes that the tech does not actually offer as much practical or reliable usefulness as its promoters initially suggested.
Gartner is not alone in its concerns. As Goldman Sachs' Head of Global Equity Research Jim Covello noted in July regarding generative AI, "While the question of whether AI technology will ever deliver on the promise that many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceedingly expensive, and to justify those costs, the technology must be able to solve complex problems, which it is not designed to do."
This does not mean that Apple Intelligence (or any other consumer-facing AI) is useless. It raises questions, however, about how much demand for iPhones could potentially be driven by such services.
Apple, undeniably, isn't on the brink of collapse. Despite a lack of significant advancement, it remains among the globe's largest and most financially successful corporations. It retains its dominance in the smartphone sector and continues to expand its service-oriented business. Intriguingly, the corporation forecasts that its service division's growth will maintain its current quarterly rate of approximately 13% growth – a pace it might sustain for several years.
However, if the iPhone segment begins to regain momentum, Apple might also witness improved financial outcomes. Yet, for now, it seems destined for merely satisfactory performance.
Artificial Intelligence appears to be the only plausible engine of development, but it's far from being a guarantee.
There's no pressing reason to sell off your Apple stocks, at least not immediately. Remember, there are other businesses with more promising growth trajectories in the current market climate.
- For investors interested in the technology sector and looking to diversify their portfolios, considering investing in companies that are heavily involved in generative AI development, such as Apple, could be a promising strategy.
- Given the projected growth of smartphones capable of handling generative AI and the potential demand for such devices, Apple's AI efforts, including Apple Intelligence, could be a key factor in its future financial performance.