Apple's recent scramble to catch up to other tech firms in the field of artificial intelligence likely will pressure its profit margins, an investment firm says.
The company's AI initiative is going to be a costly undertaking and profits could take a near-term hit, Deepwater Asset Management managing partner Gene Munster said in a blog post Monday.
"Apple's margins have defied the laws of gravity for a decade," Munster said. "Despite total revenue being down 2.8% in fiscal '23, net income margins were 25.3%, essentially in line with fiscal '21 record 25.9% margin. That compares to Apple's 21.7% margin in fiscal '13."
But to match peers like Alphabet's Google and Microsoft, Apple needs to invest heavily in AI software and data center infrastructure, Munster said.
Profit Margins Could Dip Later This Year
"My guess is over the next couple years, starting in the back half of this year, we will see net income slowly decline," with a margin closer to 24%, he said.
Munster added, "Apple knows it needs to move fast and is exploring all options when it comes to adding generative AI into their products."
Bloomberg reported Monday that Apple is in talks to license Google's Gemini AI engine to develop AI features for the iPhone. Apple also has had discussions with OpenAI about a possible deal. Plus, Apple is developing its own large language model code-named Ajax and a chatbot dubbed Apple GPT, Bloomberg said.
The Bloomberg report follows news that Apple has canceled its decade-long effort to make a self-driving electric vehicle so it can focus on AI instead.
"The news of Apple launching its own model and talking with Google and OpenAI to license a foundation model speaks to the degree that the company's growth North Star has changed over the past month," Munster said.
Artificial General Intelligence Is Goal
Apple sees AI having a profound impact on its business. And it's not just looking at the current trend of generative AI, but to the next level of the technology, which is "artificial general intelligence," or AGI, Munster said. Artificial general intelligence is a type of AI that can perform as well or better than humans on a wide range of cognitive tasks.
"I believe Apple now gets it," he said. "They need to add AI to the company's core competency of hardware, software, and services. To get there, I expect more investment, and a slight decline in margins in the near term, and expanding margins long term."
Last week, news reports revealed that Apple earlier this year acquired DarwinAI, an artificial intelligence startup focused on making AI systems smaller and faster.
Meanwhile, Apple Chief Executive Tim Cook has promised that Apple will "break new ground" in AI later this year. Analysts expect the company to detail its AI initiatives at its Worldwide Developers Conference in June.
On the stock market today, Apple stock rose 1.4% to 176.08.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
