Can Apple's AI initiatives drive a product cycle?

Despite initially sliding, Apple (AAPL) shares have risen as investors digest the tech giant's AI announcements. New Street Research technology infrastructure analyst Antoine Chkaiban joins Market Domination to discuss

Chkaiban notes that while Apple's Worldwide Developers Conference (WWDC) on Monday had "boring" moments, "it was exciting because we thought it articulated very well the promise of generative AI at the core of the operating system." However, he doubts whether the technology alone can spark a product cycle, explaining, "we're not really convinced that on-device AI will enable game-changing user experiences because the hardware simply is not game-changing... since GPT-4 is anyway available readily on most iPhones through the ChatGPT app, the question is, do users really need to upgrade to use that technology? The answer so far is not really."

Regardless, he believes the stock is "fairly valued," especially as services are at an all-time high.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video transcript

Um Let's talk more about this move that we've been seeing because analysts have been cheering Apple's A I announcement.

It's a little mixed.

It took a little bit uh a beat for them to get excited.

Shares initially slid after Monday's keynote before surging to record highs.

The next day joining us now is Antoine Kon who is New Street Research technology Infrastructure analyst, Antoine.

Good to see you again.

Um So what do you make of this sort of delayed reaction that we got in the Apple shares to all the announcements?

Yes.

Hi Julie.

Thanks a lot for, for having me.

Um So yes, I would say that the keynote on Monday was uh boring and inspiring at the same time because on one hand, they presented exactly what the iphone experience should be when it comes to using Siri uh in general, figuring out a plan uh combining like a Uber trip and a boarding pass, um an address in the calendar entry, et cetera, et cetera.

All these experiences are at best frustrating today and all of a suddenly appeared very sleek and very pristine um in the keynote on Monday, but that's kind of a deja vu, right?

And on the other hand, it was exciting because uh we thought it articulated very well the promise of generative A I at the core of the operating system, it really has the power of uh redefining the way we interact with technology, um content creation tools with uh like instructions coming in as natural language um context now being taken into account uh as well in in the way the US interacts with the user, um creativity with the US, generating content and executing tasks.

Um Supposedly with minimal instructions.

So yes, that's, that's why our thoughts were mixed when we watched the Keynotes um on Monday.

Uh and I think the stock reaction also reflected that originally.

Um now, uh I think it also shows the fact that Apple is working very hard um on, on all this.

And um I think the fact that uh it could drive a product cycle uh is still an open question.

It's maybe what is driving the stock now, maybe this is what is giving confidence.

Um The market is getting confidence in the fact that it could drive a product cycle.

Maybe that's what we're seeing in the stock uh right now.

But you think Antoine, um you think too soon to say about whether it's gonna drive a product cycle?

Yes, because I mean, I, I really don't really have a good answer for you because on one hand, you have Apple intelligence that will only be compatible with, um you know, the products that are based on the uh A 17 pro and M one chips and above.

So that's maybe about 10% of the apple active install base.

So, uh if features are well received, it could foster replacement because it's only 10% that's compatible.

Uh But on the other hand, it's a big gift because for now, we're not really convinced that um on device A I will enable game changing user experiences.

Uh Because the hardware simply is not game changing.

Uh You don't really see an inflection point, you know, in uh like the compute the I compute that that are in the phones.

Uh It's growing of course, but there is no inflection point.

And um since GP T four is any way uh available uh readily on most iphones through chat, through the chat GP T app, uh the question is, do users really need to upgrade to use that technology?

Uh The answer so far is not really.

So we'll have to see if the integration with the operating system is really a game changing experience.

So Antoine put all that together.

What do you think that means for further upside or not?

For Apple shares?

Yes.

So if you take a step back on all this and, and look at the apple stock, so I think the stock is, is fairly valued.

Um you know, reality is that growth has peaked on, on most phones.

Uh iphone peaked in in December uh 2021 back in September 2022 with uh you know, the share gains uh over 2029 2019 to 2022 driven by uh Huawei being paid out in China.

Um And the move to in-house Silicon is now mostly behind on, on the macrons.

Then you have ipad that peaked in December 2020 with the installed base growth.

Now now slowing and refresh cycles elongating.

So then if you look at services, they're at all a no time high and that's driven by the App store that's driven by licensing or the deal they have with, with Google and um that collection of businesses will likely continue to grow in double digits in, in aggregate, but we see limited room for an acceleration here as well.

So bottom line is that Apple has maybe a mid to high single digits growth outlook.

Um and it's trading at a very significant premium to the S and P uh to SNP names with, with a similar growth profile.

So, so yes, we we still have a little and and on the product cycle driven by A I as I was mentioning earlier.

So put all that together and uh and that's why we're neutral on the name.

You do note Antoine, I want to get to this that the keynote Apple's keynote was music to the ears of arm.

How come Antoine?

Yes.

Well, if you, and actually, if you, if you look at the implications uh of the event like a second order derivative for the broader technology infrastructure supply chain, there's arm but um I mean, Apple is going to have to pay like it's going to have to pay open A I to to get uh uh GP T or O in in the US.

And we estimate that uh Apple would incur a cost of about $10 per device per year.

So in the near term, if it's only 10% of the 2 billion devices installed base, um uh that's 2 billion per year uh in total $2 billion per year in total.

Um uh But over the long term, if all the installed base starts using uh extensively uh models like that, um it would cost Apple maybe $20 billion on the full installed base of 2 billion devices.

And so um uh if they want to, to, to uh if a wants to uh to have uh access to enough compute uh to support such a large installed base, they, they themselves in Microsoft will have to buy a whole lot of GP US.

So they would have to spend maybe tens of billions of dollars on GP US.

So first of all, before we talk about arm, that truly reinforces our, our, our positive bias in NVIDIA.

And then for arm, well, it pushes up um arm based silicon content inside the phones because you have uh the model part of the, the technology is powered by um on device uh inference.

Um And so that's obviously positive for arm and then uh since it's a positive for NVDR, uh and as you know, the gray CPU um that NVD I is is going to be selling with uh with Blackwell, but they are already studying with Hopper is also based on uh on the arm instructions at architecture.

So that's also a positive for Arm Antoine.

Super interesting take, I appreciate your time.

Thank you so much for joining us today.

Thank you.