Apple's AI launch at WWDC could hinge on something it hates to do

Apple is set to unveil a host of new AI technologies later today in California. How users will access them remains a big question.

Jun 10, 2024 - 18:30

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Apple's AI launch at WWDC could hinge on something it hates to do

Apple shares nudged higher Monday, putting them back within touching distance of their recent record highs, as investors look to the tech giant's highly anticipated unveiling of its AI ambitions later today in California.

Apple (AAPL) , which has lagged most of its Magnificent 7 peers this year and lost its place as the world's second-largest company by market value to Nvidia (NVDA) last week, is looking to recapture investor interest with a compelling AI narrative at its World Wide Developers' Conference later today.

The WWDC, an annual event at Apple's Cupertino headquarters, typically focuses on the software developers who work with the tech giant to design new apps for its myriad consumer devices.

The company also issues updates to its current system, including new features and improved performance, across its installed base of iPhones, Macs, iPads and Apple Watches.

This year's event, however, will focus largely on Apple's plans to infuse those devices with both a new operating system and a likely new family of apps with generative-AI technologies.

In what could be the group's most important development since it launched the iPhone in 2006, investors are looking to today's WWDC to both unveil the group's near-term AI plans as well as its broader strategy to harness the power of the fast-developing technology.

Apple CEO Tim Cook
Justin Sullivan/Getty Images

"We believe that the impact of generative AI to Apple's business is one of the most profound in all of technology, and unlike much of the innovation in AI that's impacting the developer or enterprise, Apple has a clear opportunity to reach billions of consumer devices with generative AI functionality," said D.A. Davidson analyst Gil Luria.

Big change in Apple tactics

Near-term success for the group's plans, however, could hinge on a decision that Apple has been largely reluctant to take under both current CEO Tim Cook and his predecessor, founder and tech-market icon Steve Jobs.

Apple's business relies on a tightly controlled ecosystem of devices and services that are easy for consumers to navigate but leaves them with few options outside the Apple embrace.

With an installed base of 2.2 billion devices, the infusion of AI technologies is likely to provide a key boost to services revenue, which is the fastest growing of Apple's overall business mix. But it may come at a price that Cook may find uncomfortable.

Reports suggest that Apple is likely to unveil an agreement with OpenAI, the developer of the ChatGPT chatbot, which is also backed by Microsoft (MSFT) .

That would mark the first time on record that Apple has outsourced a key technology to a rival partner as it seeks to quickly close the gap between itself and big tech rivals in the AI space. But it would also cede some control of that technology to an outsider while raising data-privacy risks for a company that has jealously guarded its user base.

"The reality is the most exciting parts of Apple's AI-driven features will be powered by a third party, likely for the next three years," said Deepwater Asset Management analyst Gene Munster. "This was the right decision for Apple to make up lost time."

"Eventually I believe Apple will will release its own small language models in the next year that run specific generative tasks on-device," he added. "Over time I believe Apple will come out with its own foundation model that will replace OpenAI."

Older iPhones shut out of AI?

Another crucial aspect to Monday's WWDC event will hinge on how, or indeed whether, Apple will allow the bulk of its user base to participate in the new AI technologies.

Reports suggest Apple's new operating system, iOS18, will enable only users with an iPhone 15 Pro, and ultimately the new iPhone 16, to access the best of the new AI features.

That would leave those holding older phones requiring handset upgrades to keep pace with Apple's new technology drive.

Deepwater's Munster believes this could trigger a massive iPhone upgrade cycle over the coming years, driving big gains in handset revenue.

"Don't overthink it: The iPhone is still the primary driver of Apple, and I, along with most investors, estimate 40% of iPhone users have a phone that is more than four years old and ready for an upgrade (compared to a typical cycle of 20-25%)," Munster said.

"Over the last year and a half, iPhone sales have been down on average 2% per quarter," he added. "If iPhone returns to 5% growth over the next three years, the company will likely exceed expectations in [calendar years 2024 and 2025] and prove to be a catalyst for shares of Apple to move higher."

Luria at D.A. Davidson argues that a move by Apple to unveil AI features and functionality that are exclusive to the iPhone 16 could trigger a 35% surge in overall handset sales growth, help generate $10.27 in adjusted earnings in Apple's next fiscal year and lift the stock to as high as $240 per share.

That decision, however, could alienate owners of older iPhones and compel Apple to bring headline-grabbing AI advancements to the market in order to trigger demand for the autumn launch of the iPhone 16.

App developers to the rescue

CFRA analyst Angelo Zino notes that while AI incentives will be key for a new upgrade cycle, Apple might not be ready to deliver the kind of game-changing offerings consumers are willing to pay for.

"Integration (of its new AI technologies) within third-party apps is more likely a 2025/2026 story, which could disappoint some and will keep it from being an ultimate personal assistant," Zino said.

"Generative AI enhancements will likely include both cloud-based and on-device upgrades, with Apple to emphasize greater privacy as a key differentiator to competitors."

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Wedbush analyst Dan Ives says, however, that app developers — the "heart and lungs of the Cupertino growth story" — will be more than happy to accelerate updates on the back of Apple's new AI foundation.

"As more developers build apps over the next year around AI, this activity and monetization will happen within the Apple ecosystem to tap into its unmatched installed base globally," Ives said. He carries an outperform rating and $275 price target on Apple stock.

Apple shares were marked 0.46% higher in premarket trading to indicate an opening-bell price of $197.79 each. The stock hit an all-time high of $199.62 on Friday and is now valued at just over $3.02 trillion.