Nearly 560 days after OpenAI launched ChatGPT, the company finally unveiled the "AI gift package" at the 2024 Worldwide Developers Conference (WWDC), catching up with the 'late-night shift' of generative artificial intelligence. Apple has named its AI capabilities "Apple Intelligence," which is based on an built-in large language model for understanding and executing user voice or text commands, and covers both proprietary and third-party native applications. Apple also announced a partnership with OpenAI to incorporate ChatGPT with GPT-40 support to accomplish more advanced tasks.$Apple (AAPL.US)$On the day of (June 10 US Eastern Time), Apple's stock fell 1.92% as most AI features had been expected by the market. However, two days later, the stock rose 7.26% and 2.86% in consecutive days, reaching a historical high. Within two days, Apple's market cap increased by $305.9 billion, surpassing Nvidia (NVDA.O) and reclaiming the second-highest market cap in US stocks.

Prior to this, analysts' concerns about Apple's valuation mainly came from two aspects - the slowing growth of iPhone sales and unclear prospects for artificial intelligence. With Apple's firm stance on artificial intelligence, the market expects AI to bring the company new incremental space - particularly in the smartphone business, which accounts for more than half of its revenue, and thus driving valuation growth. Currently, the strategic significance of Apple's AI projects outweighs their actual value. The next key point is the iPhone 16 series, which will be launched in September. Goldman Sachs hardware analyst Michael Ng believes that generative artificial intelligence may not have a significant impact on Apple's short-term finances, but the key is whether it can boost hardware sales over time.

As of the time of publication, Apple's stock price rose 1.5% to $216.27 per share, with a total market capitalization of $3.32 trillion, once again surpassing Microsoft and Nvidia.

Contrary to the impression of many people, Apple is not a cutting-edge innovator, but it is good at integrating gradually mature technologies at appropriate times to provide users with excellent user experiences. The application of AI technology is no exception. Since 2017, Apple has added a "neural engine" to its iPhone and Mac chips, allowing users to use AI facial recognition to unlock their iPhone or fingerprint scanning on their Mac. Apple has also published papers related to large-scale language models.

Until early this year, the specific plan of Apple's AI strategy remained unclear. During the latest quarterly conference call, Apple CEO Tim Cook only mentioned, "We believe in the transformative power and prospects of AI, and we believe that we have the advantage to stand out in this new era." Behind Apple's hesitation is the inability of current AI technology to bring revolutionary innovation to hardware devices. According to BOC International, the development of AI mobile phones has mainly gone through three stages: the application stage of AI, various large models made into app products, such as the wenxin yi yan, etc.; the functionalization stage of AI, the large model is basically integrated into the mobile phone application, such as Galaxy S24, etc.; the native stage of AI, where the AI intelligent body becomes the entrance to link the digital ecosystem.

Catching the 'late-night shift' of AI

"Mac", "iPod", "iPhone", "iCloud"... Apple likes innovation and is also good at integration. "Many products and services are not directly invented by him, but he is a master of combining creativity, art and technology." Walter Isaacson wrote in his book Steve Jobs. For example, before the iPod was released (in 2001), Creative Technology in Singapore had already launched a groundbreaking music player device; before the birth of the iPhone (in 2007), Motorola attempted to combine its RAZR phone with the iPod to produce the ROKR music phone; and when Vision Pro, the mixed-reality headphones, was released in 2023, the wave of the "metaverse" had already receded...

However, Apple is not a cutting-edge innovator, but it is good at integrating gradually mature technologies at appropriate times to provide users with excellent user experiences. "AI technology is the same. Since 2017, Apple has added a "neural engine" to its iPhone and Mac chips, allowing users to use AI facial recognition to unlock the iPhone or fingerprint scanning on the Mac. Apple also published research on large language models. Now, Apple's strategic position is greater than its actual value, but the next key point is the iPhone 16 series to be launched in September.

As of now, the strategic significance of Apple's AI projects outweighs their actual value. The next key point is the iPhone 16 series, which will be launched in September.

Currently, the application stage of AI has been relatively mature, and the market is transitioning from AI functionalization to AI automation, meaning that users can actually download apps directly instead of buying AI PCs or AI mobile phones.

"Most users who are interested in AI functionality actually download and use the app," said Ville Petteri Ukonaho, vice president of emerging device technology services at TechInsights, to Barron's Chinese edition. For smartphone makers such as Apple, AI will not become an important selling point.

In the case where the AI hardware application scenario is not yet mature, Apple's entry at this time is mainly due to the contraction of market space for existing businesses.

Among them, the decline in iPhone sales is the main reason for the company's revenue drag. According to TechInsights data, in the fourth quarter of 2023, iPhone shipments increased slightly by 1% year-on-year, lower than the global smartphone shipment growth rate of 7.1%; in the first quarter of this year, iPhone shipments decreased by 11% year-on-year, while global smartphone shipments increased by 9.7% year-on-year.

Especially in the Chinese market, which accounts for about 18% of the market, iPhone shipments in the first quarter plummeted by as much as 19% year-on-year. TechInsights believes that this is due to the geopolitical tensions between China and the US and Huawei's comeback in the 5G market, which has brought strong headwinds to Apple. Therefore, Apple started a large price reduction in China from the end of May, with a maximum price reduction of more than 2000 yuan for the iPhone 15 series, and major e-commerce platforms have also launched "iPhone 15 limited-time promotions". The final effect of this round of price reduction will be reflected in the company's third quarterly report released on July 24.

Just when Apple was struggling with sales, the "AI concept" was booming. Due to the surge in demand for AI chips, Nvidia's first-quarter (as of April 28) revenue increased by 262% year-on-year; Microsoft's Intelligent Cloud department's revenue in the quarter ending March 31 increased by 21% year-on-year, becoming the best-performing business segment. From the perspective of existing business growth and AI growth potential, Apple needs to join this AI territory battle-at least to release the signal to the outside world that they participate in this battle.

Manufacturers facing sales challenges are not limited to Apple. Due to the extension of the replacement cycle and the weakness of consumer electronics, after a series of attempts such as system transformation and folding screens, smartphone manufacturers are turning to AI to stimulate sales growth. IDC's preliminary forecast shows that the global shipments of new AI phones will increase from 51 million units in the previous year to 170 million units in 2024, accounting for nearly 15% of the total number of smartphones sold. As industry participants promote the development of new chips and further mature usage scenarios, this share is expected to rapidly rise after 2024.

Apple needs to join the AI ​​territory battle from the perspective of existing business growth and AI growth potential-at least to release the signal to the outside world of their participation.

The stock price rose ahead of the fundamentals.

Manufacturers facing sales challenges are not limited to Apple. Due to the extension of the replacement cycle and the weakness of consumer electronics, smartphone manufacturers are turning to AI to stimulate sales growth.

IDC's preliminary forecast shows that the global shipments of new AI phones will increase from 51 million units in the previous year to 170 million units in 2024, accounting for nearly 15% of the total number of smartphones sold. As industry participants promote the development of new chips and further mature usage scenarios, this share is expected to rapidly rise after 2024.

Since the end of 2023, mainstream manufacturers have begun to release AI phones intensively. For example, in January of this year, Samsung Electronics (005930.KS) launched the Galaxy S24 series with Google's Gemini model, which can achieve practical functions such as "search and search" and "real-time call translation".

According to Counterpoint statistics, within three weeks after the launch of the Galaxy S24 series, sales increased by 8% compared to the previous generation products, and in the first quarter, it accounted for 58.4% of the market share of generative AI smartphones, demonstrating a significant head-effect. However, few other models can receive similar positive feedback. It is not easy for Apple to catch up.

For the "AI gift package", users may replace their smartphones for freshness in the short term. Currently, Apple Intelligence is only applicable to iPhone 15 Pro models, which account for only about 5% of the total installation of iPhones. The upcoming iPhone 16 series, to be launched in September, will be the next focus of the market.

"Apple Intelligence is limited to iPhones sold last year, which makes us more convinced that AI can help the company launch a super iPhone cycle," wrote Evercore ISI analyst Amit Daryanani. Morgan Stanley, BofA Securities and other institutions have expressed similar views.

Looking at the longer timeline, the boost effect of hardware sales brought by the "AI gift package" is full of uncertainty. The optimization of the Apple Intelligence experience does improve, but it does not bring meaningful innovations, including functions such as using "memos" to generate images and completing video creation with voice in "photos".

IDC China research manager Guo Tianxiang bluntly stated that if viewed from the perspective of functions and usage scenarios, Apple's AI functions have not brought much new and innovative content, most of which have been implemented on Android smartphones.

In the case of insufficient innovation, Guo Tianxiang believes that the closed system is Apple's unique advantage. He pointed out that Apple's AI functions are closest to the concept of "AI intelligent body" among mobile phone manufacturers-which is the third stage of AI nativeization mentioned earlier. AI functions can land on self-owned and third-party applications, which is difficult for Android manufacturers to achieve currently or even in the future.

However, due to the limited on-device computing power, Apple's advanced generative AI tasks must rely on the GPT-4o cloud to be completed. Specifically, when processing AI tasks, Apple will use its on-device small model first to keep the data locally; if the task exceeds the small model computing power, it will be transferred to the large model of the private cloud for calculation; when facing more difficult tasks, Apple will seek for Chats GPT for more accurate feedback.

Although Apple claims that user data will not be stored by OpenAI, it still raises market concerns about data security. Ukonnaho pointed out that secure AI is Apple's best choice and one of the biggest sales drivers. Cooperating with OpenAI means that some data may be beyond Apple's control range or may cause some users to choose to quit AI.

In addition to hardware sales, Apple also needs to pay a usage fee to OpenAI (there are also reports that Apple will promote OpenAI through its distribution system). In theory, the company can benefit from the growth of iPhone 16 sales, and may also charge users for advanced AI or charge related app developers. But currently, Apple has not disclosed relevant financial expenditures, and the direction of cash flow is still unknown.

"For now, Apple Intelligence is just a way for Apple to quickly enter the AI field and 'please' investors, and the solution has not been finalized." Ukovna said, expecting Apple to improve AI in the 2025 or 2026 operating system, and then we can see more impact of AI projects on hardware sales.

Even if the sales and financial impact of iPhone 16 is unknown, Apple's stock price has risen sharply for two consecutive days, which shows that this 'pleasing' method has worked. As a hardware manufacturer, the underlying logic of Apple's valuation is still based on product sales. But at this stage, it is enough for Apple to enter the AI field- even if Apple Intelligence has not shown too many advantages and features, according to historical experience, investors still bullish that Apple can come from behind.

Since the beginning of the year, Apple's stock price has risen by 11%, still lagging behind the Nasdaq index's 17% increase, and almost all of the 11% increase has occurred in the past two days. Among other tech stocks, Microsoft, Nvidia, ALPHABET (GOOGL.O), Amazon (AMZN.O), and Meta (META.O) have increased by 18%, 153%, 27%, 23%, and 44% respectively this year; Tesla (TSLA.O) has fallen by 29% this year.

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