Apple is playing an expensive game of AI catch-up

Apple Is Playing an Expensive Game of AI Catch-Up

Apple has made a strategic decision to shift its focus from developing cars to generative artificial intelligence (AI), a move that reflects current industry trends. The car project, known as Project Titan, has experienced various starts and stops over a decade, making it a sensible choice to redirect efforts toward more promising areas. Generative AI is currently a central focus for major tech companies, and Apple's perceived lag in this domain has impacted its stock performance, resulting in a 7% decline this year. Despite the challenges, Apple boasts substantial resources, with $107 billion in free cash flow and nearly $65 billion in cash on hand.



However, entering the competitive AI race demands significant investments in components and computing networks. Apple will be competing for crucial chips, such as GPU systems produced by Nvidia, which have become scarce due to high demand and production bottlenecks. Apple's rivals, including Microsoft, Google, and Amazon, have outspent the company in key areas, posing a challenge in acquiring these vital components. Apple's total capital expenditures for 2023 were approximately $9.6 billion, significantly less than its major competitors.



Moreover, the transition to AI involves more than just reallocating investment dollars. Generative AI services often rely on extensive computing networks, an area where Apple lags behind its big-tech rivals. While Apple has 26 data centers globally, Microsoft, Google, and Amazon each operate over 300, with significantly higher capital expenditures on data centers. The trio of rivals spent approximately nine times more than Apple on data center capital expenditures in the past year. This discrepancy highlights the need for Apple to make substantial investments and build out its computing infrastructure to compete effectively in the AI landscape.



The specific form of Apple's AI efforts remains uncertain. It could involve the integration of AI processors into its devices, potentially enhancing products like the iPhone. In a note to clients, Toni Sacconaghi of Bernstein suggested that even modest AI capabilities could stimulate incremental iPhone upgrades, especially considering weak demand in recent cycles for Apple's flagship smartphone. A more intelligent Siri, powered by advanced AI, could potentially drive consumer interest and lead to increased adoption of Apple's products.