Apple Gets AI Right
This past month witnessed many tech stocks rise or fall on the basis of their moves in the artificial intelligence (“AI”) space. It all started when ChatGPT became the fastest growing app in history, which was followed shortly by a major rally in $Microsoft(MSFT.US$ shares on news that it bought a $10 billion stake in OpenAI. Later, $NVIDIA(NVDA.US$ rallied after it beat earnings and raised its guidance thanks to AI chips.
Conspicuously absent in all of this AI talk was $Apple(AAPL.US$ . The world’s largest company by market cap, it’s among the smaller tech companies as measured by public statements about AI. In its most recent earnings call, Apple only mentioned AI two times, compared to 74 for NVIDIA, 62 for $Alphabet-C(GOOG.US$ and 37 times for $Meta Platforms(META.US$ .
Conspicuously absent in all of this AI talk was $Apple(AAPL.US$ . The world’s largest company by market cap, it’s among the smaller tech companies as measured by public statements about AI. In its most recent earnings call, Apple only mentioned AI two times, compared to 74 for NVIDIA, 62 for $Alphabet-C(GOOG.US$ and 37 times for $Meta Platforms(META.US$ .
However, Apple might actually be making the right moves in the long run. By taking things slowly with AI, it is allowing other companies to demonstrate where the risks and opportunities lie, enabling Apple to move in later on when the correct approach is clearer.
The BlueMail move was smart because it showed that Apple is aware of one of the issues with AI: liability. AI applications sometimes create content that is objectionable. For example, Bing’s chatbot has been known to insult users. The legal implications of this content remains a grey area, but when uncertainty like this abounds, it pays to wait.
Before going any further, I need to debunk one popular misconception about Apple and AI: the claim that Apple isn’t doing anything in the AI space. Nothing could be further from the truth. Apple has many products that use AI, including:
Face ID - a wildly popular facial recognition security feature used mainly in the iPhone.
Notes - a note taking app that incorporates handwriting recognition.
The app store - uses AI for providing recommendations based on the user’s download history.
As you can see, there is no shortage of AI investment at Apple. To the contrary, AI is being actively incorporated into many of the company’s products. What Apple is taking slowly is simply one AI use case, which is “large language models,” the technology behind ChatBots like ChatGPT. There are many good reasons for Apple to avoid rushing into this space. For one thing, text applications have never been Apple’s Forte, Pages has barely any market share and Apple has never had its own in-house search engine. Second, Chatbots are risky. It’s fine for OpenAI to release a ChatBot to the public because it’s a relatively small tech company that doesn’t do much other than sell AI models. But if you take a big company and start shoving chatbots into its products, risks begin to emerge. Inaccurate information, bullying of users and even threats have been cited as some problems with Microsoft’s Bing Chatbot. Lawyers continue to debate what the implications of inaccurate replies and abuse in ChatBots will be–some say that big tech is covered by Section 230, others argue that it doesn't apply to content the company itself created. As an investor, what you need to know is that there are legal risks present in this race to rush out AI ChatBots, and Apple is wise to play it safe here.
Face ID - a wildly popular facial recognition security feature used mainly in the iPhone.
Notes - a note taking app that incorporates handwriting recognition.
The app store - uses AI for providing recommendations based on the user’s download history.
As you can see, there is no shortage of AI investment at Apple. To the contrary, AI is being actively incorporated into many of the company’s products. What Apple is taking slowly is simply one AI use case, which is “large language models,” the technology behind ChatBots like ChatGPT. There are many good reasons for Apple to avoid rushing into this space. For one thing, text applications have never been Apple’s Forte, Pages has barely any market share and Apple has never had its own in-house search engine. Second, Chatbots are risky. It’s fine for OpenAI to release a ChatBot to the public because it’s a relatively small tech company that doesn’t do much other than sell AI models. But if you take a big company and start shoving chatbots into its products, risks begin to emerge. Inaccurate information, bullying of users and even threats have been cited as some problems with Microsoft’s Bing Chatbot. Lawyers continue to debate what the implications of inaccurate replies and abuse in ChatBots will be–some say that big tech is covered by Section 230, others argue that it doesn't apply to content the company itself created. As an investor, what you need to know is that there are legal risks present in this race to rush out AI ChatBots, and Apple is wise to play it safe here.
There is one very obvious and real way in which Apple’s conservatism with ChatBots could pay off:
It could create cost efficiencies.
LLMs are known for being very costly to run. Morgan Stanley once estimated that if Google implemented a ChatGPT like Chatbot, it could cause a $6 billion hit to operating income (“EBIT”). The problem is that Chatbots are very resource intensive and use up a lot of computing power. If you can avoid having a Chatbot application in your product line and remain popular, then you save money by not having one. So, Apple could potentially save a lot of money relative to companies like Microsoft, and enjoy higher margins.
It could create cost efficiencies.
LLMs are known for being very costly to run. Morgan Stanley once estimated that if Google implemented a ChatGPT like Chatbot, it could cause a $6 billion hit to operating income (“EBIT”). The problem is that Chatbots are very resource intensive and use up a lot of computing power. If you can avoid having a Chatbot application in your product line and remain popular, then you save money by not having one. So, Apple could potentially save a lot of money relative to companies like Microsoft, and enjoy higher margins.
Having looked at where Apple stands with respect to AI, it’s time to explore the stock’s valuation. We’ve seen already that Apple is actually making a good move by taking things slowly with AI, rather than a bad one. Still, that on its own does not make its stock a buy. If a company saved $50 billion by avoiding unwise AI investments and was overvalued by $100 billion, it would still not be a buy. Nothing deserves an infinite price. So, let’s take a look at Apple’s valuation compared to its competitors.
Going by multiples, Apple is pretty middle of the pack for FAANG stocks.
As you can see, Apple is right in the middle of the pack for all of the earnings and cash flow based valuation ratios. It does have the highest price/book ratio, but that metric is mainly used for identifying cases of truly extreme undervaluation–none of the stocks in this peer group are anywhere near that category, so we could say that that ratio isn’t applicable to this peer group based valuation.
Compared to its peers, Apple looks to be “modestly” valued. That is, assuming that all of the companies involved have comparable growth and profits in the future. AI might change that. If Microsoft and Google go head to head in an AI chatbot war, then Apple may enjoy better margins than either company by side stepping the AI arms race. If so, it may command a premium.
Compared to its peers, Apple looks to be “modestly” valued. That is, assuming that all of the companies involved have comparable growth and profits in the future. AI might change that. If Microsoft and Google go head to head in an AI chatbot war, then Apple may enjoy better margins than either company by side stepping the AI arms race. If so, it may command a premium.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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