June 17, 2024

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1 Stock to Buy Before It Breaks New Ground in Artificial Intelligence (AI) Next Month

5 min read

Artificial intelligence (AI) has been one of the biggest driving forces behind the current bull market.

In the 18 months since OpenAI released ChatGPT on November 30, 2022, the S&P 500 has produced a total return of 33%. The AI trend has been fueled by announcements from Microsoft, Nvidia(NASDAQ: NVDA), Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL), and practically every other major tech company in the world. There’s no doubt AI development has advanced considerably in a relatively short amount of time.

One company has been relatively quiet when it comes to what it’s working on, but management promised to “break new ground” in generative AI this year. And those groundbreaking announcements could come in just a few weeks.

Apple(NASDAQ: AAPL) is set to take the wraps off its AI development and partnerships at its annual Worldwide Developers Conference (WWDC), which starts June 10. Here’s what investors can expect and what it means for the stock.

A graphic depicting a computer processor with the letters AI printed on it.

Image source: Getty Images.

Apple’s AI ambitions are different from the rest of big tech

Central to Apple’s brand is a focus on data privacy and security. As such, it’ll highlight the fact that most of its AI features will work on your personal devices.

Apple has built its own large language model capable of features like summarizing missed notifications, providing a synopsis of a news article, or transcribing voice memos, according to a report from Bloomberg’s Mark Gurman. It’ll also improve upon existing features like auto-populating your calendar, suggesting apps, and editing photos.

None of these features are particularly groundbreaking in and of themselves. But the promise of more on-device AI capabilities down the road as Apple improves its LLM could be the bigger story. As AI features play an increasingly larger role in our digital lives, the ability to keep data private and secure with on-device processing may be the next big step forward in AI, with Apple leading the charge.

In the meantime, though, Apple knows there’s huge demand for AI features it can’t necessarily deliver with its current on-device capabilities. As such, it’s struck a partnership deal with OpenAI to integrate some of its technology into the next iteration of iOS. It’s also held talks with Google to use its Gemini model, but they have yet to come to an agreement.

Apple’s secret weapon as it races to catch up in AI

One of the biggest limiting factors in developing AI technology is the need for compute power. Nvidia has a stranglehold on the high-end GPU market, and it can’t make chips fast enough to keep up with demand. While that’s been great for Nvidia’s bottom line, it makes it extremely costly for big tech companies building out data centers full of Nvidia GPU clusters.

Almost every big tech company that’s currently using Nvidia chips for their AI data centers is developing their own chips for training large language models, including Microsoft and Alphabet. But developing cutting-edge chips is hard, and getting them manufactured takes a long time.

Apple is using its own chips in its AI data centers, which saves it money and reduces the potential for bottlenecks other big tech companies may experience as they procure Nvidia chips and print their own. Apple is currently using the M2 Ultra chips found in the Mac Pro computer for its data centers. Next year, it could switch to the M4 chips found in the latest version of the iPad Pro released earlier this month. Its existing manufacturing relationships mean it can be very fast and cost effective in building out data centers as it ramps up its AI efforts.

The fact that it’s using the same chips to train its LLM as it uses in its devices is also promising for the future of on-device AI capabilities for Apple’s products.

What it means for investors

It’s unlikely Apple will monetize many of its new AI features directly. Instead, the new capabilities may push a large portion of Apple’s 2.2 billion user base to upgrade their devices. On-device AI capabilities may only be available on the latest hardware and may encourage more device storage for all those AI-edited photos and videos.

The majority of iPhones in use in the United States are more than two years old, with about one-third of users holding their phones for three years or longer. These devices are ripe for an upgrade, especially if Apple gives iPhone owners a bit of a push. That could lead to a surge in sales for fiscal 2025, which starts in October. New iPhone models typically come out in September.

Meanwhile, advanced AI capabilities built into the iPhone could open the door for developers to build new AI-powered apps. Apple could capitalize by building what analyst Dan Ives is calling an “AI App Store.” AI-enabled features, such as circle-to-search found on Google’s Pixel phones, could drive more traffic to search engines. And Apple could see a nice boost to its services revenue if it does. Court documents revealed Apple receives a 36% cut of all of Google’s search revenue on iPhones, Macs, and iPads.

AI could fuel sales in the two biggest segments of Apple’s business in fiscal 2025. The announcements next month could be just the start.

While shares are approaching their all-time high again, the stock still looks attractive. Its forward price-to-earnings ratio approaching 30 may curb its appeal for some, but a premium price is justified due to its massive share repurchase program, its existing net cash position, and the long-term outlook for another period of strong earnings growth next year and beyond.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Apple, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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