The artificial intelligence space has proven to be one of the hottest topics in the tech sphere in recent memory. It started with ChatGPT galvanizing the world with its disruptive capabilities, followed by Microsoft Corp. (MSFT, Financial), which announced an additional $10 billion investment in OpenAI. Moreover, chip giant Nvidia Corp.'s (NVDA, Financial) fourth-quarter earnings had AI written all over it, which resulted in a healthy rally in the stock.
Surprisingly, the largest tech company in the world in terms of market cap, Apple Inc. (AAPL, Financial) , has remained relatively silent about its AI plans. The company's apparently lethargic approach to AI may have irked some of its investors, but it should not surprise those who have long followed the company. It has never been a first-mover in advancing a particular technology. Instead, it employs a long-term approach by weighing the risk-reward and then delivering a superior solution. Over the years, its wait-and-see strategy has paid many dividends for the company, becoming one of the most profitable FAANG stocks over a sustained period.
Besides, does Apple need AI to turn things around for its business? Apart from the macro headwinds weighing down the company, it continues to turn heads with its quarterly numbers. Having said that, let's go more in-depth to understand Apple's positioning in the AI race and its implications.
Incremental innovation
Apple has never been one to jump on the bandwagon of a particular technology, especially if they are not consumer-proven. For instance, it was not the first company to enter the smartphone space and only entered once it could deliver a robust solution. The market leader at the time of the iPhone's release in 2007 was Nokia (NOK, Financial), which cut and ran from the smartphone business several years ago. On the flip side, iPhone sales have grown by a whopping 304% from 2010 to 2022.
However, to say that Apple does not have a presence in AI would be daft. Take its voice assistant Siri, which uses modern-day AI to deliver answers to spoken requests. Additionally, the company's facial recognition technology uses AI to authenticate the identity of a particular user. Moreover, the app store uses AI to provide information based on customer recommendations and other variables.
I guess everyone is alluding to the lack of Apple's presence in generative AI. To be fair, there could be multiple reasons apart from the company's track record in the past to explain the sluggishness. First, ChatGPT and other chatbots are under scrutiny for providing inaccurate information, bullying users and their inherent biases. Many lawyers continue to debate what the implications of the inaccuracies of chatbots could be over the long term.
Furthermore, these chatbots are not cheap. According to investment firm Morgan Stanley, if Alphabet's (GOOG, Financial) Google implemented an AI chatbot, it could result in a whopping $6 billion hit to its operating income due to the resource intensiveness of the technology.
If it ain't broke, don't fix it
The tech punditry has been on Apple's case for not announcing or releasing its patented AI chatbot. However, they seem to ignore the real question: Does Apple need a ChatGPT-like chatbot?
Apple is not in the search engine market like Microsoft or Google, and neither is it Meta Platforms (META, Financial), which needs another growth driver following the anemic expansion of its metaverse project. Apple's business remains rock-solid because of its timeless products and sticky ecosystem.
Over the past three years, the company's average sales per share have grown to 20% and 17.2% over the past five years. However, sales growth has slowed dramatically in the past 12 months, at just 5.8%, for obvious reasons.
The tech giant is operating in a highly unconducive market, which is negatively impacting its top and bottom-line performances. CEO Tim Cook discussed the difficult environment during the fourth-quarter earnings call. However, he remains upbeat on the company's prospects, saying it is "focused on the long term and leading with our values in everything we do." Besides, Cook noted the company would have grown in most markets without the foreign exchange headwinds weighing it down.
Additionally, Apple's paid subscriptions are at a mighty impressive 935 million, surpassing 2 billion active devices in its installed base. What is most impressive about the company is its services business, which accounted for a record $20.8 billion in sales from $117.1 billion in total sales during the fourth quarter.
Takeaway
Apple operates a best-in-class business in the tech sector. It has a relatively low-risk business strategy where it takes its time before astonishing the world with its offerings. The same is the case with its AI endeavors, where it is biding its time before adding value to the sector.
On the flip side, the AI space, especially regarding large language models, is a nascent sector that still has a long way to go before it matures. Many problems have surfaced with ChatGPT, Bard and other knock-off chatbots that have been created over the past several months. Therefore, Apple's relatively reactive approach is perhaps the best way to play the AI trend.
Furthermore, if we look at its GF Value, Apple has a fair value of $171.11, which points to over 15% upside potential from its current price. Therefore, the stock is modestly undervalued based on historical ratios, past financial performance and analysts' future earnings projections, meaning it could potentially gain in the latter half of the year.
