Has Apple Fumbled AI?

Apple has arguably missed out on the artificial intelligence (AI) rally that has propelled its ‘magnificent seven’ peers, with investors apparently underwhelmed by its seeming lack of progress in the field. However, a partnership with OpenAI could signal a key challenge for Apple’s competitors, particularly Alphabet’s Google.

• Apple expected to announce partnership with OpenAI in June.
• Apple’s share price saw brief 2% gains on recovering Chinese iPhone shipments.
• Global X Artificial Intelligence and Technology ETF has gained 31% in past 12 months.

Apple’s AI Woes

If Apple [AAPL] is hoping to convince investors that it isn’t falling behind competitors on artificial intelligence (AI), it would seem to be failing.

Its flagship iPad Pro launch was widely decried as a flop; within days of the release, Apple was forced to admit to Ad Age that an advert featuring a hydraulic press flattening an array of creative instruments and tools had “missed the mark”.

Apple is now playing catch-up with the likes of Alphabet [GOOGL] and OpenAI, who are powering ahead with new generative AI products. While these haven’t been a blanket success either — Google’s AI Overviews have caught attention for providing outlandish inaccuracies, which CEO Sundar Pichai told The Verge are an “inherent feature” of large language models — they have at least demonstrated progress.

According to the New York Times, however, Apple could be set to encroach on Google’s territory by bringing generative AI search to Siri, its iPhone web browser, in collaboration with OpenAI. It is expected that the partnership will be announced at Apple’s annual developers’ conference on 10 June.

In the view of Dan Ives, Managing Director and Senior Equity Research Analyst at Wedbush Securities, becoming the go-to consumer AI device is “the future of the iPhone”.

Earlier this month, Ives told CNBC that, in this regard, Apple has an advantage over Google in what he called the AI “game of thrones”. When asked how Google might respond to a partnership between Apple and OpenAI, Ives replied: “I don’t think they have that answer yet.”

On the same day as Ives made the comments, Google unveiled a suite of new AI integrations for its Android operating system, including overlays of Gemini, its Chat-GPT-like AI assistant, onto Android apps.

Signs of Recovery in Chinese iPhone Market

All this is playing out against a backdrop of challenges for Apple.

In recent months, the company has been sued by the US justice department, fined by EU regulators, and faced slumping demand in China, as the iPhone loses market share to local premium smartphone competitors such as Huawei and Xiaomi [1810:HK].

Again, however, Apple might have cause for optimism. Apple stock gained 2.3% in premarket trading on 28 May following news that its iPhone shipments in China grew 52% year-over-year in April, even if these gains had been mostly lost by the end of the session.

The boost in shipments follows a price-cutting campaign which has reduced the price of some iPhone models by as much as ¥2,300, according to Reuters. Apple CEO Tim Cook told investors last month that the iPhone market in mainland China is growing, despite Apple reporting an 8.1% drop in Q2 revenue within the Greater China region.

Is Apple Still a Buffett Favourite?

While some investors may be wondering if weakening iPhone demand could be the reason why Warren Buffett dumped approximately 116 million shares, or nearly 13% of his stake, during Q1, the so-called ‘Oracle of Omaha’ told Berkshire Hathaway [BRK-B] shareholders at the firm’s annual meeting that the sale was predominantly for tax reasons.

Buffett also reassured investors that Apple will still be the firm’s largest holding by the end of the year, “unless something dramatic happens”.

As of Berkshire Hathaway’s most recent 13-F filing, Apple accounts for 40.8% of Buffett’s portfolio. It has, historically, been the legendary value investor’s favourite stock; at the end of the previous quarter, it accounted for more than half the portfolio.

Other leading investors have piled into the stock. Ray Dalio, Founder and former CEO, Chief Investment Officer and Chairman of Bridgewater Associates, bought 1.8 million shares in Apple in Q1. Having only owned 1,009 in the previous quarter, this amounted to a 166,009.5% increase in Bridgewater’s Apple stake.

How to Invest in Apple and AI

Equally, Steven Eisman, Managing Director of Neuberger Berman, feels that Apple could be a “hidden AI play”.

“When the apps show up, the biggest probably [sic] beneficiary is going to be Apple because they’re going to have a refresh of literally everything that they sell,” he told CNBC’s Fast Money.

He went on to add that these apps would drive demand for new hardware purchases: “I know for sure that when all those apps come on my phone, I’ll need a new phone, and I’ll need a new iPad and I’ll need a new laptop.”

Apple’s share price has flatlined in 2024, closing 29 May down 0.9% year-to-date and gaining just 7.9% over the past 12 months, a modest return compared to other large-cap AI players. By comparison, Alphabet has gained 25.9% year-to-date and 42.2% over the past year.

For more diversified exposure to the players in the AI race, investors might consider a thematic ETF such as the Global X Artificial Intelligence and Technology ETF [AIQ]. The ETF holds both Apple and Alphabet as of 29 May, at respective weightings of 2.7% and 3.3%.

AIQ has gained 9.8% year-to-date and 30.6% over the past 12 months.