Apple’s frenzied scramble to catch up to other tech firms in the field of artificial intelligence (AI) likely will pressure its profit margins, Deepwater Asset Management Managing Partner Gene Munster says.
Gene Munaster for Deepwater Asset Management:
The news of Apple launching its own model and talking with Google and OpenAI to license a foundation model speaks to the degree that the company’s growth North Star has changed over the past month. First, it was Project Titan getting canceled, now it’s considering doing something rare at Apple, license another company’s tech stack. I believe Apple now gets it. AGI [Artificial General Intelligence] has the potential to have a profound impact on their business, and they need to add AI to the company’s core competency of hardware, software, and services. To get there, I expect more investment, and a slight decline in margins in the near-term, and expanding margins long-term.
The bottom line is Apple knows it needs to move fast and is exploring all options when it comes to adding generative AI into their products. In the end they may do both, come out with their own model to power some features across their product line and license a model to power other features. We should hear more on the topic in a month during the March quarter earnings call.
While the potential of licensing a foundation model adds some complexity around who has the rights to your personal data (Apple or Google for example), I believe in the end Apple will find a way to get users comfortable with opting into personalized AI.
A likely form that personalized AI would take is an AI subscription model, like the existing iCloud, Apple TV+, News, Music, etc. My guess is it would be priced similarly at about $10/month to have access to personalized AI.
Apple has 2.2B active devices and I estimate there to be 1.4Billion users. If 15% of its users subscribed to Apple’s personalized AI, it would add 6% to their overall revenue.
Apple’s AGI ambitions go beyond building or licensing a model. They’ll likely include data center build outs, an area that Apple has lagged Google and Meta over the past five years. Closing that gap will likely have a slight negative impact on margins.
My guess is over the next couple years, starting in the back half of this year, we will see net income slowly decline, losing 130 bps, to closer to 24.0%, down from 25.3% in FY23. This implies an annual step up in AI investment of about a $5B. Some of that will be capex and will find its way to the net income line over deprecation in the years ahead.
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MacDailyNews Take: Why does Apple need to scramble madly in 2024 to catch up in AI? Lack of vision, ironically. Or, distracted by Vision, at least.
Either way, looking in the wrong places or being blind to what’s coming is a sad indictment of Apple’s “leadership,” headed by Tim Cook, who’s currently in China pitifully kissing CCP ass in a vain attempt to stave off the inevitable.
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[Thanks to MacDailyNews Reader “Fred Mertz” for the heads up.]
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