Hiroshi Watanabe
Over the past couple of years, concerns have emerged that Apple (NASDAQ:AAPL) has lagged rivals like Nvidia (NVDA), Microsoft (MSFT) and others in the generative artificial intelligence space, as investors have rewarded them with massive valuation increases.
Despite these concerns, investment firm Bernstein believes the tech giant has a lot to say to consumers and investors on the topic.
And it starts with the iPhone.
What is an AI phone?
The term “AI phone” is seen as a bit “fluffy,” as everyone seems to have different definitions of what it actually is. However, most agree that AI’s capabilities are largely “incremental” and not revolutionary, Bernstein analyst Toni Sacconaghi wrote in an investor note. Sacconaghi has a Market Perform rating and a $195 price target on Apple.
Samsung (OTCPK:SSNLF) recently released its Galaxy S24 line and integrated several AI-related features, including the ability to edit photos, real-time translation, and the ability to tag photos.
Apple is likely to use AI for similar tasks, but could go a little further, given its ability to integrate software and hardware, Sacconaghi speculated.
“We expect potential AI capabilities that are broadly consistent with existing products, including advanced image and video capture/editing tools, translation and transcription, improved messaging support, enhanced Siri, and greater automation in music, among others “, wrote Sacconaghi. “We also believe Apple will look more closely at and integrate its apps for greater ease of use.”
Other AI-specific features that Apple might include could be tied to Apple’s next silicon, which is expected to be the 3-nanometer A18, Sacconaghi suggested.
Will it help?
The perception in the investment community is that Apple has fallen behind the competition in generative artificial intelligence, even as the company has increased spending on the technology and reportedly built an in-house version of ChatGPT.
Apple has been overtaken in market value by Microsoft (MSFT) and Nvidia (NVDA) has become the poster child for generative artificial intelligence in the eyes of investors as its market capitalization has skyrocketed 230% during the last year.
While the iPhone’s AI capabilities aren’t unique, the power of the company’s marketing capabilities could be enough to cause a “materials refresh cycle,” Sacconaghi said.
“We note that Apple was late to competitors in introducing large screens (6/6+ cycle), OLED (iPhone X), and 5G, but each triggered significant upgrade cycles for Apple,” he said Sacconaghi.
“Our analysis suggests that every 100 [basis point] the iPhone upgrade fee change would represent an increase of about 8 million phones sold, or about $7 billion in iPhone revenue, adding [roughly 300 to 400 basis points] to fiscal year 2025 and 100-200 iPhone revenue [basis points] to overall revenue growth,” he added.
If Apple were to further raise prices of the iPhone 16 (as Google (GOOG) (GOOGL) did with the Pixel 8 over the Pixel 7) thanks to AI features, growth could be further strengthened, he continued.
Bites from Apple
Apple isn’t one to talk about its future products and services, but the company has beefed up its comments on generative artificial intelligence of late, including in this month’s earnings call.
“In terms of generative AI… we have a lot of work going on internally, as I mentioned before,” CEO Tim Cook said on the earnings call, adding that the company has “some things that we’re incredibly excited about “. which we will talk about later this year.”
Cook’s most recent comments are described as “more specific and indicate greater investment and enthusiasm for AI than statements made in previous calls,” Sacconaghi said.
There have also been numerous media reports in recent weeks, citing sources close to the matter, who have strongly implied that the next version of iOS will likely be chock-full of AI-related updates.
If Apple is going to inject the next iOS with as many AI features as possible, it’s likely to do so at its next developer conference, scheduled for June, Citi said.
The investment firm highlighted reports that Apple is preparing to unveil a generative artificial intelligence tool for iOS developers, expanding the capabilities of its Xcode programming software in a bid to better compete with Microsoft’s (MSFT) GitHub Copilot.
Apple has reportedly been working on the tool for the past year and has expanded feature testing internally and accelerated development ahead of an expected release later this year. The company is also said to be working on bringing AI features to the next version of macOS, Apple Music (playlist creation automation), and revamping its Spotlight search feature.