Apple is Far Behind Cloud Providers in Generative AI Says Needham Analyst
Investment thesis is Apple will be half the size of cloud hyperscalers
While you may see some breathless headlines indicating Apple’s generative AI breakthrough is right around the corner, Laura Martin, Needham's senior media and internet analyst, is not convinced. She spoke with Yahoo! Finance’s Racheelle Akuffo after Apple’s iPhone 15 launch event.
RACHELLE AKUFFO: …Here we are in the middle of this sort of era defining moment at the beginnings of generative AI, which has the potential to touch every aspect of our lives. How we live, how we work, how we manage our data. Where is Apple in this conversation?
LAURA MARTIN: So I think it's pretty far behind three companies, which I think are arms dealers, which is Microsoft with OpenAI, Google with its three large language models, and AWS, which is owned by Amazon, which is going to house third party large language models. So those three cloud companies, it's our opinion will end up twice as big as Apple in the end.
Apple will integrate generative AI into its own business, but my opinion is every American company to survive will have to use generative AI to either lower cost or accelerate the product introduction focus…[Apple] won't get the upside growth of the big cloud providers that are underscoring or undergirding the generative AI growth rate.
Half the Size of the Cloud Providers
Martin has generally been bullish on Apple, forecasting a 25% stock price increase in 2023, and a Buy rating as recently as September. However, she just told Yahoo! Finance that she expects the big cloud providers to be double the size of Apple. That is despite the fact that Apple continues to have a much larger valuation than its peers at $2.77 billion.
Apple has “a monopoly on the 15% wealthiest people in the world,” according to Martin. That is going to continue to generate cash for the company through new device sales and App Store purchases. However, the Needham analyst says generative AI is going to fuel tremendous growth for the leading cloud providers, and Apple will be largely left out of that windfall.
This is partially due to Apple being in a different business. It is not planning on offering large language model (LLM) access to companies building generative AI powered applications. That means it will miss out on the cloud computing service revenue, as expected.
With that said, ChatGPT looks like a billion-dollar annual consumer software business today, and it recently added an enterprise version. Apple could offer a similar app or bake the capabilities into Siri. The company chooses not to because it wants to invent the next great digital device.
If Apple redefines the VR headset and becomes a mass-market device, it could be another enormous win for the company. There is just no indication consumers will head in that direction anytime soon. Apple may maintain its valuation, but the tech giants focusing on generative AI are expected to grow significantly more quickly.
Instead, Apple will invest in incremental generative AI features that enhance the iPhone, AirPods, and Mac experiences. Generative AI will be a feature for Apple and not a product—similar to how it has handled Siri.
The new generative AI interest that appears to be rising in Apple is almost certainly related to the Vision Pro. An LLM-powered digital assistant and the ability to create on-the-fly customizations would be nice additions. They will also be required to compete effectively with Meta’s Quest. Then again, it might be another decade before the VR market really takes off.
The Importance of Generative AI
Beyond the valuation of the tech giants, Martin also suggested that every business will need to adopt generative AI to compete effectively in the coming years. She points out two key reasons: reducing cost and increasing new product introduction cycles.
Take a moment to consider how outlandish this type of comment would have been 12 months ago. The reasonableness of that comment today is another indication of how the market has shifted. An IBM survey earlier this year found that 66% of board members and 64% of investors were pressuring CEOs to accelerate generative AI adoption.
It is true this could all be a fad, but investors don’t think so. Analysts such as Martin and many CEOs are convinced generative AI is critical for business survival. That conviction will fuel generative AI adoption over the next 24 months at many businesses, but maybe not at Apple. The Cupertino giant will just keep printing money by selling more iPhones and taking a 30% cut from in-app purchases. At the same time, it may fall behind its rivals because it won’t take generative AI seriously.
As my friend Chris Messina likes to say, “Apple is a fashion brand that makes jewelry that connects to the internet.” There is nothing about generative AI or LLMs that screams fashion or luxury. That may explain Apple’s current generative AI blindspot, or it may be a reason for the company to ignore it. Besides, there will be plenty of iPhone apps that use the technology. 😀📲