Apple's AI future can be summed up with a big question mark

By Cody Willard

How will 'Apple Intelligence' differ from Google, Amazon and other rivals?

Computers "can amplify an inherent intellectual ability that man has, and really take care of a lot of drudgery, to free people to do much more creative work." - Steve Jobs in 1981.

It's fascinating to wonder where Apple Inc. (AAPL) would be today and what it would be doing in artificial intelligence if co-founder Steve Jobs were still at the helm. Apple's current AI strategy can be summed up with a big question mark.

We don't yet know the specifics of the company's plans, although Apple on Tuesday did announce its first purpose-built AI product, the new iPad Pro. Apple is expected to reveal much more about its AI strategy at its annual Worldwide Developers Conference (WWDC) on June 10.

Apple actually has a lot of history in AI and machine learning, although it hasn't always been positive. For example, it's absolutely flabbergasting that Apple has not improved Siri. Perhaps it's a testament to how much the quality of AI is determined by the power of the chips that it runs on. Other than detecting your voice saying "Hey Siri," almost all of Siri's functionality is empowered by the cloud.

Besides Siri, Apple has experience using AI and machine learning in Apple Photos, Maps, Music, and many other parts of the Apple ecosystem. Furthermore, Apple's facial-recognition feature uses deep learning to analyze facial structures. Apple has also modified its custom silicon products for its devices to incorporate neural engines that make AI and machine-learning workloads run much faster.

What will 'Apple Intelligence' (AI) look like?

"Apple Intelligence," Apple's AI, has at least three key things going for it: data, unrivaled form factors, and Apple's capex-light model.

If you are an iPhone or Mac user, Apple arguably knows all about you. This is incredibly powerful and valuable data for Apple, which can be used to dramatically improve the quality and utility of the AI. However, using this data to train an AI or otherwise directly attempt to monetize it would run contrary to one of Apple's core values: privacy. Apple reportedly collects only minimal data about its users. Its Maps data, for example, does not associate the actual user with the location. Rather, it uses random identifiers that are regularly reset to avoid creating a profile of movements and searches.

So will Apple use its access to a potential treasure trove of user data to its advantage in AI? The answer is yes - with a twist. Apple is focusing all of its efforts on running AI on the device itself, or at the "edge" as it is known. Apple's privacy policy simply limits the extraction and centralization of user data - but Apple has no qualms about using user data to improve the functionality of its devices, as long as the data never leaves the device. In order to achieve this goal, Apple has to make extremely powerful and efficient chips that are able to run AI on the device, rather than in the cloud. The real question is whether Apple can come up with a combination of software and hardware that will allow for AI training on the device, not just inference.

Apple will likely use some combination of on-device AI and federated learning to train its AI models so that it can continue to say it is protecting user privacy. Ultimately, our data is being used by Apple and others to monetize products and services. It's foolish to think you can be part of the Apple ecosystem and not have your data used to further monetize you as a user.

Possibly, Apple can build AI that acts like an agent and less like a chatbot. ChatGPT, Google Gemini, Anthropic Claude, and other AIs right now simply operate in a question-and-answer format. They do not currently have the capability to actually do anything for you. If Apple can figure out a way to incorporate AI into the OS so that it can not only respond like a human, but act like a human, then that will take AI to the next level.

Apple could potentially build out Siri (or a new voice agent) that could book your Uber to your favorite restaurant. Instead of telling you what your schedule looks like for next Tuesday, it will be able to set up meetings using video-conferencing software and send invitations to all of the participants.

Obviously, the potential for an AI that is built into the operating system of the iPhone, Mac, Vision Pro or other device that has the capability to interact with your apps and do things for you is tremendous. This AI won't likely be a standalone profit center for Apple, but it would further drive iPhone adoption and pull forward iPhone upgrade cycles.

One final big advantage for Apple in AI is that it will be a capex-light strategy. Alphabet (GOOG) (GOOGL), Microsoft (MSFT), Amazon (AMZN) and Tesla (TSLA) will be spending more than $200 billion combined this year alone on building AI data centers. Apple actually will be a beneficiary of this spending, because it will gain access to the best compute available to use in its products without the expense. Apple already works with all of the major cloud-service providers - Alphabet, Microsoft and Amazon - and will be able to leverage their advanced compute to build its own AI.

No doubt, Apple AI will be useful and exciting once it's here. It may not be a massive growth driver for Apple, but it will be a great addition to the already powerful Apple ecosystem, and will continue to entrench Apple as the world's leader in computing hardware.

Cody Willard is chief investment officer at 10,000 Days Capital Management and the publisher of TradingWithCody.com, a subscription trading newsletter offering real-time trade alerts.

Willard and/or 10,000 Days Fund LP were net long AAPL, META, GOOG, AMZN, TSLA, and NVDA, and owned put positions on MSFT at the time of publication. Positions can change at any time and without notice.

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Also read: Apple refreshes iPad Air and iPad Pro lineups - while talking up AI

-Cody Willard

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05-11-24 0556ET

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