Apple needs to leave its ‘comfort zone' on AI. Elon Musk could help.
Apple has repeatedly delayed promised AI updates to Siri, its digital assistant. That has undercut hopes that such an upgrade could revive growth in iPhone revenue, which has stagnated since hitting $205 billion in Apple's fiscal 2022. Apple shares were down 16% this year as of Friday's close.
The prospect that Apple will be able to deliver an impressive AI-enabled iPhone on its own is becoming more remote. The company recently lost one of its top AI researchers—Ruoming Pang, who led its machine-learning foundation model team—to Meta Platforms, according to The Wall Street Journal.
That means the focus is on Apple's potential to strike a deal with an external AI partner. Melius's Ben Reitzes says Elon Musk's xAI could be the ally it needs.
'Apple could provide xAI with the users it needs to top [ChatGPT developer] OpenAI in return for giving Apple all the benefits of owning an LLM [large language model] without the capex," wrote Reitzes in a research note on Monday.
Apple didn't immediately respond to a request for comment from Barron's on its AI plans.
Any AI deal that Apple strikes with a third party risks its lucrative relationship with Alphabet's Google, in which the iPhone marker receives a percentage of the ad revenue from searches on its devices. The arrangement, which makes Google the default search engine on Apple devices, led to a $20 billion payment from Google to Apple in 2022, according to court filings.
However, the Google-Apple deal is already at risk, with a judge currently considering potential curbs on the search-engine company after ruling last year in an antitrust lawsuit brought by the Justice Department that it had acted as a monopolist. That could make the time ripe to look elsewhere.
A deal offering Apple a cut of subscriptions to xAI's products could offset a loss of revenue from the Google deal.
One drawback of a partnership with xAI would be to leave Apple dependent on an external partner and a controversial one at that, with xAI's Grok chatbot having recently published a number of antisemitic posts. The company subsequently removed the posts and said they were the result of unauthorized changes made to the chatbot.
Apple's preference for tight control over its platforms could mean it prefers to buy an AI provider. The search specialist Perplexity is a potential target frequently mentioned by analysts.
Acquiring Perplexity could cost Apple more than $20 billion, considering its latest valuation of around $18 billion, but would likely still boost its shares, according to Reitzes. The Melius analyst calculates that if 100 million Apple users bought Perplexity's Pro Tier subscription at $200 a year, that would completely cancel out the potential loss of Google payments.
'Tim Cook and his team are likely to be rewarded for thinking bolder to accelerate Apple's AI push, even if they have to step out of their comfort zone," Reitzes wrote.
News Corp, the owner of Barron's publisher Dow Jones, has sued Perplexity, alleging copyright infringement. News Corp also signed a multiyear partnership with OpenAI in March 2024.
The stock was up 1.3% at $213.97 in early trading. Reitzes has a Buy rating and $240 target price on the stock.
Write to Adam Clark at adam.clark@barrons.com
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