August 26, 2024 at 05:31PM
An iPhone event has been rumored for awhile and it will be no surprise if it leans heavily on AI.
Third Point hedge fund manager Dan Loeb recently bought Apple shares and wrote about them in the fund’s most-recent letter:
Apple Intelligence” suite to drive iPhone upgrade cycle
App Store likely to become primary platform for consumer AI apps
2.2 billion device installed base
Strong two-sided network effects (developers and users)
Proprietary silicon and data privacy expertise
AI-enabled virtual assistant could emerge as first “killer app” in consumer AI
His comments:
In April, we took a position in Apple, the world’s leading consumer technology franchise, with an ecosystem of 2.2 billion devices spanning a broad array of form factors including smartphones, tablets, laptops, watches, earphones, and smart home devices. Apple excels in most of these device categories, with revenue share of 50-60% in several key markets.
Despite Apple’s dominance as a business, its stock had become increasingly “under-owned” by institutional investors and its relative multiple had compressed toward a multi-year low. We believe that this was due to several years of stagnant earnings growth, exacerbated by more recent fears that Apple may turn out to be an AI loser. Our research led us to a different conclusion: we believe AI-related demand could drive a step change improvement in Apple’s revenue and earnings over the next few years.
We believe Apple’s recently announced “Apple Intelligence” suite of AI-enabled smartphone features – the most compelling of which is a next-generation virtual assistant – will start driving meaningful new demand within Apple’s installed base, resulting in accelerating revenue growth on two fronts. First, iPhone revenue is going to see a marked improvement because Apple Intelligence features will not be backwards-compatible with existing iPhone models, creating the conditions for a forced upgrade cycle. Second, Apple’s App Store is likely to become the primary distribution platform for most new consumer-focused AI apps such as OpenAI’s ChatGPT (with which Apple recently announced a partnership). We expect Apple’s claim on the future economics of these apps to be substantial as it exploits its distribution advantage.
We believe Apple’s distribution advantage stems first and foremost from its unparalleled app ecosystem – which would be virtually impossible for any competing new technology platform to replicate given the powerful two-sided network effects linking app developers and app users. In addition, Apple has AI-specific product advantages conferred by its many years of work on proprietary silicon and data privacy. These advantages will be critical to the commercialization of an AI-enabled virtual assistant, which we believe may emerge as the first “killer app” for consumer-focused AI. And while we know little about the eventual capabilities and reach of this new offering, we believe the emergence of an AI layer on iOS will increasingly augment consumers’ own agencies with those of the iPhone’s AI features.
If Apple can execute on this opportunity, the monetization form factors will follow and have the potential to increase Apple’s earnings meaningfully. This would not only be a sharp departure from the past several years of stagnant earnings growth, but also a direct repudiation of the consensus bear case. Despite the stock’s recent strong appreciation, we see room for significant upside ahead as the magnitude of this new AI opportunity surprises.
This article was written by Adam Button at www.forexlive.com.
