Apple Intelligence

For those of you who would prefer to listen:

Apple has officially entered the AI race. The company has faced criticism for months for being late to the party. Better late than never. And realistically, the delayed timing is very much in Apple’s style. This year’s announcement at its annual Worldwide Developers Conference, held in Cupertino, was the most widely anticipated Apple speech since Steve Jobs introduced the iPhone 17 years ago. 

CEO Tim Cook introduced “Apple intelligence”: “The personal intelligence system for iPhone, iPad, and Mac that combines the power of generative models with personal context to deliver intelligence that’s incredibly useful and relevant.” In other words, Apple launched a systemwide update to software on its devices offering the use of AI. It will take the power of Apple silicon to understand and create language and images. It can be leveraged across various apps and draw from your personal use to simplify and accelerate everyday tasks. This from Cook: “We think Apple Intelligence is going to be indispensable to the products that already play such an integral role in our lives.” He’ll probably be proved right.

In true Apple fashion, the company strongly emphasized privacy. Most of the processing will be done at the device level instead of the cloud. That will prevent private personal information from being used and stored on servers in the cloud. Apple did state that running larger AI models will still be kept private by running its own servers with what it calls “Private Cloud Compute.” Apple continues to be a leading agent for privacy.

The big announcement within Apple Intelligence was the partnership with OpenAI. ChatGPT will help expand functionalities for Siri. This has been a longtime coming. Siri was an early AI tool being one of the first voice assistants launched back in 2010. It just never really evolved and improved over the years, while so many other innovative programs did. Perhaps this is the boost that Siri needs to become popular again. In addition, Apple also showed off new AirPod capabilities that will allow users to take a phone call or send it to voicemail by simply nodding or shaking their head. I guess that’s something, although I don’t see too many people under the age of 30 actually use the iPhone as, you know, a telephone. Apparently, sticking your ear to the device and talking into it to another person is not a common event for the younger generation. I sound so old just typing those words…

In addition to unveiling its AI strategy, Apple also announced updates to its operating systems for Macs, AirPods, the watch, and the Vision Pro headset. This news wasn’t really novel, as so many other companies have moved much faster than Apple in Artificial Intelligence. The thing is, Apple hasn’t really been an innovator for a while. The way to think about Apple is: Never first. Usually best. Remember, Apple didn’t invent the smartphone. But the iPhone changed the world because Apple made the smartphone better.

Over the years, as the company matured, Apple has really become a platform company. The greatest innovations have largely been found in the App store. That won’t change. In fact, it will probably accelerate. With over 2 Billion active devices around the globe, Apple is a major gateway to AI.

Siri will get smarter and expand what it can do with personal information. Users will also be able to type to Siri, making it more like a chatbot. Siri will also be able to locate items and scan personal information within emails or text messages, as well as work across numerous apps. There will additionally be a suite of new writing tools available that can proofread and rewrite text across all word-related applications, with the ability to change the writing tone to make it sound more concise, friendly or even professional. Writing has become a lost art.

Soon you will find: “I can use ChatGPT to help with that” will be a common phrase from Siri. Users won’t even need a ChatGPT account. Apple is also planning integrations with other large language models (LLM) and who knows, it may even be developing its own in-house platform after falling behind in the AI race. Apple always keeps things tight-lipped about what’s going on in Cupertino.

The set-up was ripe for a sell-the-news event. Apple’s stock had already rallied 15% since early May. The stock bumped right up against its all-time high of $197, reached almost exactly one year ago. That was a level of resistance; A glass ceiling if you will. Sellers came out to take profits. The stock fell 3% on the day. The losses didn’t last.

The following day, Apple’s stock exploded higher. It punched through $200 for the first time ever, reaching a fresh, all-time high. In doing so, Apple passed both Nvidia and Microsoft, regaining the crown as the most valuable company in America. Microsoft reclaimed the throne Friday. But make no mistake, Apple is a $3 Trillion company again.

It was the best 2-day run for Apple in 15 years. In just 2 trading sessions, Apple increased in value by $300 Billion. To put that in perspective, that’s more than the total value of The Coca-Cola Company and Chevron. It happened in just 2 days. After going sideways for a year, with wide swings of volatility, Apple’s stock finally broke out. Apple put the Stock Market on its back and drove it higher.

Here’s the thinking about the Apple breakout: Apple Intelligence will only be available on the iPhone 15 Pro/Max and iPad and Macs with M1 or better. That’s estimated to be just 5% of current iPhone owners. 3/4 of iPhone owners have a 13 or lower. That means a massive AI-driven upgrade cycle is possible if not probable.

The iPhone accounts for roughly half of Apple’s revenue. For the past 2 years, iPhone sales have been stagnant. In fact, they actually declined by over 10% in the March quarter. Apple last experienced a surge in iPhone sales early on in Covid. That’s when the faster 5G chips launched. The average lifespan for an iPhone has been on average 4-7 years. There are 1.5 Billion loyal iPhone users around the world. Most just got a new reason to buy new phones. 1.5 Billion people won’t be buying new phones anytime soon. But chances are, within a year, a large number will. That’s certainly what the stock price suggests. 

Here’s another thing: Apple is reportedly not even paying OpenAI for ChatGPT access. The partnership isn’t expected to generate meaningful revenue for either company at first. Apple believes that offering OpenAI’s technology to Hundreds of Millions of iPhone users is of equal or greater value than monetary payments. Apparently, OpenAI agrees. It sure seems like a great deal for Apple.

Privacy is Apple’s passion. The company intends to narrow the generative playing field so that bad actors will be less able to produce disturbing or illegal images. The App Store is curated to minimize malicious use such as scams and try to prevent fake information flow. 

I couldn’t help but reflect on the maturation process of this great American company. I thought back to something Steve Jobs said before returning to the company he co-founded. It was directed at a rival.

“Microsoft has no taste…They don’t bring much culture into their products… Their products have no spirit to them… they are very pedestrian.” Steve Jobs said that in 1996. A year later, he kicked off Apple’s historic comeback. Steve Jobs had a vision of personal computers that were sleek in design and powerful in processing. He saw the future of music being digital and how people could play near-limitless songs with an iPod. Of course, it was the release of the iPhone in 2007 that changed everything. The move to mobility never looked back. Apple became the world’s most successful provider of digital technology. The company proved this week, it still is today.

Apple is no longer the disruptor from the Steve Jobs days. He was an iconic entrepreneur and a visionary. Jobs was known for saying and doing bold things. He taught people to think different. There was only one Steve Jobs. Tim Cook never tried to be Jobs. Cook is an operator and a professional CEO. He executed Steve’s vision, stayed focused on quality and expanded the reach. Tim Cook has done a masterful job. Apple was a $350 Billion company when Steve Jobs died. Apple is a $3 Trillion company today.

Here’s Apple’s challenge: Don’t become pedestrian. The company’s strategy of producing top-quality products has secured customer loyalty for a generation. That has translated to record revenues and profits. But no generation is the same. Apple’s dominance is its to lose. In many ways, it will have to compete with itself and its legacy. Apple needs to stay relevant and keep being cool. Playing it safe and failing to innovate breeds complacency. Complacency leads to bland. Bland leads to boring. That’s when younger users look for alternatives. If you’re not trying new things and growing, you’re dying. Green shoots don’t sprout from sterile ground.

Apple Intelligence just kickstarted the next stage of this evolutionary story. It might not be the innovator it once was. It doesn’t have to be. The App store is. With 2 Billion devices in circulation and a loyal customer base immersed in its ecosystem, Apple will be the gateway to AI for Billions of people if and when they’re ready to take the leap.

Back to the Market:

Big Tech continues to be the dominant driver of the Stock Market. Narrow leadership and concentration in just a few stocks has been an issue for a while. Last year’s rally was driven by 7 stocks, affectionately referred to as the Magnificent 7. This year, leadership has narrowed even more. The three $3 Trillion companies now account for 20% of the S&P 500 index. That’s right, in an index of 500 stocks, 3 of them account for 20%. That’s never happened before.

Strength in Tech has been masking the underlying weakness and accelerating economic slowdown. Breadth has been weak with only two S&P 500 sectors finishing higher and nearly 65% of the index in the red. 80% of volume was to the downside while the Stock Market closed flat. Half the sectors have declined the last 3 months. 

The S&P and Tech-heavy NAS are up double digits so far in 2024. But the Dow is only up 2%, and Small Caps went into the weekend, falling in the red for the year. The S&P’s strength has not been widespread. Less than half the S&P components are above their 50-Day-Moving-Average. What’s more, 35% of the increase in the S&P 500 this year comes from just one stock: Nvidia. It’s been a theme throughout these 2020s; It just has not paid to be diversified. That will change.

I was invited to join a podcast and after 2 sessions, we’ve decided to try it out and make it a weekly thing. More on this next week.

Have a nice weekend. We’ll be back, dark and early on Monday. And reminder: Wednesday is Juneteenth. The Market will be closed in honor of the new Holiday. Our office will be closed as well.

Happy Father’s Day to all you fellow Dads!


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