After Nvidia added $750 billion in value this year thanks to growing demand for AI chips, investors are quickly looking for the next trillion-dollar AI winner. AI is the best investment opportunity of our lifetimes, and although Apple (AAPL) has been relatively overlooked as an AI play, the tech giant could quickly become a force to be reckoned with in the AI space. The reason is simple: Apple (AAPL) can bring AI into the consumer’s pocket by the billions, and it’s rumored to be based on one of the best AI models on the market today with comparable performance to those of OpenAI’s ChatGPT.
Two billion devices to exploit AI
Apple’s active installed device base surpassed 2 billion in February of this year, and “reached a record level in all geographic segments” at the end of the June quarter, according to comments from CFO Luca Maestri. The installed base of the iPhone too “reached a new all-time high,” and is estimated having nearly 1.5 billion active devices worldwide, having added approximately 500 million active devices since 2019 – a CAGR of 11.4% since then.
As installed active devices hit a new high, so did Apple’s subscriber count. CEO Tim Cook noted during Apple’s FQ3 report in August that the company achieved an “unprecedented services revenue record” with “more than 1 billion paid subscriptions,” which are growing at two-fold. numbers. Apple added more 65 million subscribers in the first half of this fiscal year, and more than 300 million subscribers in the last two fiscal years before its fiscal fourth quarter.
The opportunity for Apple to capitalize on AI arises from the combination of growth in Apple’s installed device base, as well as increased engagement and adoption of paid subscriptions over time. Consumer interest in AI increased earlier in 2023 with ChatGPT 100 million active users and more than a billion visits per month. Apple’s installed base enables more than 10 times more people to have easy access to AI.
Services is where AI can shine
Apple is seeing a higher contribution from its Services segment to revenue and margins – the segment is approaching an annual run rate of $100 billion, accounting for nearly 26% of revenue with a gross margin of 70.5%.
In other words, services contribute 41.1 cents to every dollar of gross profit, up from 34.6 cents just eight quarters ago. The segment saw its gross profit contribution steadily increase by 46%, from 23.7 cents per dollar in FY18 to 34.6 cents per dollar so far in FY23. It is not excluded that services will soon contribute 50 cents on every dollar of gross profit, while the segment exceeds 100 billion dollars in annual turnover.
The importance of services to Apple’s bottom line cannot be overstated: that 70% gross margin level, combined with its nearly $100 billion in revenue, has driven Apple’s margins up over the in recent years, and will likely continue to do so in the future, as transaction accounts and paid accounts continue to grow to new all-time highs.
This is exactly where AI will have the most profound impact on Apple, and why the tech giant could become a serious AI competitor.
Google and Microsoft demonstrate the revenue potential of AI subscriptions at scale – for Microsoft’s Copilot, a participation rate of 2.5% of Office 365’s approximately 382 million commercial users would equate to almost $3.5 billion in annual revenue, while a 10% adoption rate would see annual revenue reach $14 billion, according to Macquarie.
In Apple’s case, the paid subscription base is nearly three times that of Microsoft’s which it could target with an AI product, through a standalone service or in one of its three pre-existing services. bundles. Whichever path Apple chooses, there are still billions in potential revenue. Offering a standalone AI subscription for $2.99 per month could generate approximately $10.8 billion in annual revenue at a 15% login rate based on Apple’s more than 2 billion active devices, while ‘a price increase for its subscription plans could be $0.50 per month. add more than $5 billion per year.
Apple can bridge the gap with consumer AI
Apple spends millions of dollars a day with the goal of developing a conversational AI model, potentially for Siri, that would allow iPhone and iPad owners to use voice commands to automate multi-step tasks with the voice assistant. As such, Apple is in a unique position to monetize and implement advanced AI into a consumer application.
Consumers, especially Millennials, are very willing to adopt and pay for voice assistants that are as intelligent and reliable as a human. According to a PYMNTS investigation since April, more than 42% are willing to pay $10 or more per month for an assistant.
Although Apple remains tight-lipped about the progress of its AI projects, the so-called Apple GPT Chatbot is supposed to be more powerful than Open AI’s GPT 3.5 model, according to at the edge. Apple spends millions of dollars a day to train the large Ajax language model on over 200 billion parameters.
The project could find life integrated into Siri, given the multi-tasking automation applications and the range of capabilities that come from image and video recognition.
Apple noted in 2020 that Siri had more 25 billion requests made per month, a figure that could easily be increased with a ChatGPT-type chatbot installed on billions of devices. This is how Apple can become the first major player in consumer adoption of AI.
On Real vision, I’ve already pointed out that “if you take a consumer-facing company like Google” they’re in a good position because Google doesn’t “need to try to get a lot of consumers to adopt something again, consumers will continue to do so.” to use the search, it will simply be an enhanced search; advertisers will continue to use Google, the return on investment will simply improve.
For Apple, it’s the same case: there’s no need to try to convert millions of users into paying subscribers like OpenAI does; instead, it could easily integrate an advanced conversational AI model into Siri for example, and quickly convert already paying subscribers to these AI services.
Damien Robbins, equity analyst at I/O Fund, contributed to this article
The I/O fund was the first to move to AI with a 45% allocation in 2023. For more in-depth research from Beth, including 15+ page in-depth analyzes of the 10 stock positions held by the I/O fund, subscribe here.
Disclosure: The I/O fund does not currently own Apple and has no plans to buy in the next 72 hours. The I/O fund instead follows the stock for a lower entry. If you want to learn more about the best time to buy AI stocks, join I/O Fund next Thursday, October 19.th at 4:30 p.m. EST, for our premium webinar. We’ll review the specific AI stocks we’re targeting for this latest surge, as well as our action plan for confirming a stock high. Learn more here.
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