Our “Substack Trilogy” Shows What’s Next for Apple
Apple reveals its AI strategy ...
The Godfather is the leadoff flick in what’s viewed as perhaps the greatest “movie trilogy” of all time. Here at Stock Picker’s Corner(SPC), we’ve produced a trilogy of our own … an “investment trilogy” we’re calling Apple’s Next Act. And while we won't lay claim to the “greatest” status, we will make this claim: Read his report, and watch the associated video about Apple’s AI strategy — to join us as “Wealth Builders.”
Folks who’ve followed my work for years know that I’m a huge movie buff.
Old flicks like Inherit the Wind, Grapes of Wrath, It’s a Wonderful Life and more.
War movies like The Great Escape, Thirty Seconds Over Tokyo, Where Eagles Dare, 12 O’Clock High and Dawn Patrol.
Sports flicks like Miracle, Major League, Bang the Drum Slowly and Eight Men Out.
I hate “remakes.” (They’re almost always lousy.)
But I DO like trilogies … Star Wars, Back to the Future, Indiana Jones, The Equalizer, Rocky, Frankenstein, Scream, Halloween, Lethal Weapon, Toy Story and Cars.
And don’t overlook Alan J. Pakula’s 1970s “paranoia trilogy” of Klute, The Parallax View and All the President’s Men (that last one is crucial, since it inspired me to become a journalist).
And absolutely don’t overlook what may be the greatest movie trilogy of all — headlined by The Godfather.
Here at Stock Picker’s Corner (SPC), we decided to make a trilogy of our own — an “investment trilogy” about the Wealth Builder future of iDevice King Apple Inc. AAPL 0.00%↑.
And perhaps The Godfather is a worthy metaphor.
After all, Apple is the “godfather” of the tech-sector “ecosystem” – a place where its devices, App Store and cloud data create a one-stop experience that iDevice devotees don’t want to refuse.
In fact, here in the smartphone/tablet PC/notebook-computer era, Apple has executed on the ecosystem model like no other company in history.
Until now.
The tech sector – like the stock market – is a “what-comes-next” reality. A reality dominated by the “Fear of Missing Out” (FOMO) crowd at one end … and the “Doubting Thomases” at the other.
And neither group is in Apple’s corner right now. In fact, with Apple, it’s the same group.
The FOMO crowd is all-in on artificial intelligence (AI) – the hottest wealth window around. And the Doubting Thomases believe Apple has missed it. And they don’t see how Apple can boost its vaunted ecosystem without it.
We have a more upbeat view. And we’ve just produced the SPC “Apple’s Next Act Trilogy” to show you why.
This SPC “production” looks at the three powerful “triggers” that will boost that ecosystem and put Apple back on track. Our trilogy lineup consists of:
Apple’s Next Act Part I: A Heady Vision – where we delve into the vastly underrated-and-misunderstood plan to bolster its vaunted ecosystem by creating the Vision Pro headset.
Apple’s Next Act Part II: Keeping That Doctor Away – where we investigate the current status and future upside of the company’s data-driven foray into health.
And Apple’s Next Act Part III: Apple’s Blueprint and the Great AI Event – where I interview my good friend, longtime colleague and noted Apple expert David Zeiler about the artificial-intelligence (AI) strategy we expect the company to announce in the 2024 keynote of the Apple Worldwide Developers Conference (WWDC), slated for June 10.
This final installment of the “Apple’s Next Act Trilogy” is the most important of all: While Apple’s health biz is downplayed and the headset foray is misunderstood, its AI strategy (or lack thereof) is being downright pilloried.
“The narrative is that Apple is far behind rivals on AI,” said Dave, an expert on big-tech trends, Apple and cryptocurrencies like Bitcoin (BTC). “That’s only partly true. Apple is behind on ‘Generative AI,’ the kind of AI that does chats, writes articles, and generates images. On that front, Apple is catching up fast. Execs realized they were lagging in very early 2023 – and that’s when they made AI a ‘tent-pole project.’ That’s why it’s making a deal with OpenAI to include ChatGPT in the next iPhone OS (and likely will get added to iPad and Mac as well). To train its in-house generative AI, Apple made a deal with Shutterstock to get access to its millions of images. But Generative AI is not the only type of AI. There’s machine learning, which include things like big data analysis as well as things like narrow AI, which include things like facial recognition. Apple has had these types of features in its products for years. One example is Siri, with suggestions based on your daily habits, and its ability to read text in an image.”
Dave and I met at his in-house studio just outside Baltimore last week for an interview that lasted several hours. This “briefing document” is a companion piece to that interview.
Let’s start with a quick primer on AI – the technology … AND the opportunity … as it relates to Apple.
The Foundations of AI
Artificial intelligence is one of those rare things whose name really describes what it is.
I’m vastly (and intentionally) oversimplifying this. But we’re essentially talking about using networks of super-high-powered computers to simulate human thinking. And then putting that “thinking” to very specialized uses.
You’ll hear more and more about such innovations as generative AI, machine learning, facial recognition, speech recognition and natural-language processing. AI systems are fed massive amounts of data – and look for patterns or correlations to “learn” how to do work usually done by people.
AI’s benefits will traverse the spectrum. The technology will be able to automate mundane tasks, analyze vast data sets that can bolster human decision-making, identify threats, create new ways to interact with technology, accelerate innovation, enhance learning and improve entertainment.
It’ll put autonomous (self-driving/self-piloting) vehicles on the roads, in the air – and on and under the oceans of the world. It can enhance safety – for consumers in the form of home security, law enforcement by identifying patterns and trends, and the military by spotlighting enemy movements or cyberattacks.
Future uses are limited only by the inventiveness of creators around the world.
And the Wealth Builder impact will be huge.
Take “Generative AI” – the flavor of artificial intelligence that can create written content and custom images on demand.
Just that slice of the AI market has direct and indirect economic benefits of $6.1 trillion to $7.9 trillion a year, says consultant McKinsey & Co. If generative AI was a country, it would’ve ranked as the world’s third-largest economy in 2022, trailing only the United States and China, says reference website Worldometer.
And look at the overall projections.
Researcher Market Growth Reports says the worldwide AI market will grow from about $67.4 billion in 2022 to a forecasted $501.8 billion by 2026, a compound annual growth rate (CAGR) of 39.73% during that short run.
Precedence Research projects a bigger upside, with a slightly slower growth rate.
According to Precedence, the global AI market will surge from an estimated $454.1 billion in 2022 to a projected $2.5 trillion by 2032, with a CAGR burst of 19% from 2023 forward.
The U.S. slice of that market will surge from $103.7 billion to a forecasted $594 billion during that same 10-year stretch — also a CAGR of about 19%, Precedence says.
With an estimated value of about $167.3 billion, North America accounted for 36.84% of that AI market in 2022. And if you wanted to break the global AI market into pieces, the two biggest pieces were “deep learning” (36.36%) and services (39.64%), the Precedence researchers said.
Stronger Than You Think
When it comes to AI, Apple isn’t as far behind as so many of those “Doubting Thomas” investors seem to think, Dave said. It has AI technology – in its chips, in offerings such as its Siri “digital assistant” and its iOS 18 software, which will run entirely on a device – instead of on a cloud server.
That’s not to say the company didn’t fall behind a bit in the “AI Arms Race” – it did. But there’s also a “messaging issue,” where the company did a poor job cataloguing and adequately describing its storehouse of existing AI technology and as well as its blueprint for the future, Dave told me.
That could change at the 2024 installment of the Apple Worldwide Developers Conference (WWDC) – slated for June 10-14. He believes the company will go with what he’s nicknamed as “Apple’s Micro/Macro Strategy For AI.”
It’s a dual approach. On the “micro” end, Apple installs AI technology onto its devices. On the “macro” side, the company turns its entire ecosystem into an “AI Platform.”
“We’re going to find out a lot more about Apple’s AI strategy at WWDC,” Dave explained. “The conference is geared toward developers – the innovators who write the apps that run on all of Apple’s devices. The thing to watch is the Keynote Address on the opening day. That’s the table-setter … the ‘message’ that investors will be watching. So Apple needs to get it right. My expectation? In addition to integrating more-robust AI features on its devices and services, I expect we’ll see Apple position its entire ecosystem as a kind of ‘AI Platform.’ I think Apple could leverage its neural engine – which is built into the processor chip on every device the company makes – into the basis for an Apple-centric family of AI apps. I think CEO Tim Cook will challenge the developers at WWDC to innovate … to create AI applications that can tap into the AI capabilities of Apple’s ecosystem. This will be difficult for the other Big Tech companies to duplicate, since no one has the kind of vertical integration that Apple has.”
It also has more component muscle than most investors realize. Apple’s chips – the semiconductors that power its iPhones, iPads, and Macs – are actually designed in-house. And that gives Apple a great hand to play.
When you talk about AI, most folks are familiar with the flavor of that technology that requires the actual processing to take place in the cloud – on servers running Nvidia Corp. NVDA 0.00%↑ chips. But Apple’s chips bring that processing onto the actual device.
“Apple’s chips have included something called a ‘neural engine’ since 2017,” Dave said. “The neural engine is just another name for AI. It’s not quite what Nvidia is doing – most of those AI chips are designed for the cloud – but are intended to allow the user to access AI functions directly on the device. Apple also has plans to use its M-series chips on its own servers as part of its AI strategy – even as it continues its use of Nvidia chips. The idea is to let the neural engine handle simpler AI tasks on-device, while offloading the heavier-processing operations onto Apple’s cloud.”
That’ll give Apple a bite of the data-center business – a subplot of the AI storyline that’s another wealth window.
When Data Becomes a Currency
We’re seeing an explosion of digital data that has to be stored, organized and managed so that AI, autonomous vehicles, cryptocurrencies, digital payments, e-commerce, drug discovery and personalized medicine, cybersecurity and cyberwarfare, virtual working and virtual learning – and scads of other key pieces of our modern digital lives – can evolve and advance without disruptions.
One key building block of everything I just described here is the data center – self-contained tech cities where zettabytes of data are the primary residents.
Data-centers are massive buildings that house rows of networked computers, routers, switches, software, cables, power systems and more. Their massive storage capacity, and speedy operation, lets you have Zoom meetings with colleagues on other continents, binge-watch the latest movies or old TV shows, use ChatGPT to ask for a “Keto” chocolate-chip cookie recipe (and have it in a second), order that Mother’s Day gift from Amazon Prime … and, well, you get the idea.
The need for data storage is both massive – and massively underestimated.
Consultant McKinsey & Co. says power consumption is a good proxy for data center growth here in the U.S. market, which accounts for about 40% of the global market. That power consumption, which reflects the number of computer servers a data center can house, is projected to grow from 17 gigawatts (GW) in 2022 to 35 GW in 2030. Data centers will grow at 10% a year during that stretch.
A forecast by ResearchandMarkets is even more bullish. Data center hardware demand is projected to grow 12.4% annually on a global basis from 2023 to 2030. Here in the U.S. market, that yearly growth rate will be even higher — averaging 14.2% a year.
The individual projects will be massive.
And an explosion in data-center projects have created a massive appetite for chips – the ones made by Nvidia, and soon the ones Apple intends to churn out.
That’s part of the “What Comes Next” storyline for Apple, Dave told me.
“What I expect to see over the next few years – and CEO Tim Cook basically said as much in the company’s most recent earnings call – is how Apple plans to leverage both its vertical integration model of hardware, software, and cloud-based services as well as its vast ecosystem to give it an advantage in the AI wars,” Dave explained. “Other companies are focused on parts of AI, I believe Apple plans a much more comprehensive approach. And it has the tools to do it better than anyone.”
Two Other Building Blocks
Two other Apple initiatives — each one covered by an “SPC Trilogy” installment — will bolster the company’s ongoing strategy.
The first Trilogy installment focused on the Vision Pro headset, a product we like a lot — despite the lackluster response to its recent debut.
“So many critics have groused about slowing iPhone sales and the company’s failure to create new, ecosystem-expanding devices,” Dave said. “But they’re missing what’s right in front of them — the headset. Talk about a perfect addition to an AI Ecosystem: Whether it’s virtual reality or augmented reality, Vision Pro is a tremendous device. This’ll be a slow burn … but that’s okay. Critics are put off right now by the $3,500 price tag and the lack of a lot of defined uses. But the price will come down and the applications will soar. I love the thinking behind this.”
The second part of our Trilogy was healthcare – which will live and grow from the data created by devices like the Apple Watch.
“This is great, Bill, because it mines data from the ecosystem even as it makes it more useful,” Dave said. “That makes the ecosystem more ‘sticky’ … that’s an AI double play. I like that, too. No one else has Apple’s vertical integration. And that’s a huge competitive advantage in the AI Arms Race.”
You can now check our entire “Apple’s Next Act Trilogy” below:
Apple’s Next Act Part I: A Heady Vision.
Apple’s Next Act Part II: Keeping That Doctor Away.
Apple’s Next Act Part III: The AI Supercharger” (Video Interview).
If you haven’t already, you can join the Wealth Builder community here at SPC.
