Can Apple's (AAPL) Subtle AI Strategy Sustain Its Premium Valuation?

Business Insider

12 hours ago

Apple's (AAPL) AI strategy isn't focused on dominating infrastructure—it's centered on enhancing the devices users already love with smarter, more intuitive features, all while prioritizing privacy and user experience. That said, this approach alone may not fully justify Apple's premium valuation.
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The company faces slowing growth and an increasing reliance on financial engineering to sustain shareholder returns. Still, I remain moderately bullish, primarily because management appears to be actively adjusting to these evolving challenges. In terms of performance against broader benchmarks, AAPL stock has lagged behind the S&P 500 index so far this year.
Quiet Acquisitions Can Lead to Loud Results
Apple's AI strategy is built on quiet, targeted acquisitions that steadily add value behind the scenes. Take Xnor.ai, for instance—a startup acquired in 2020 for around $200 million, specializing in ultra-efficient on-device AI. That deal enabled Apple to run advanced machine learning directly on its chips, boosting privacy, battery life, and device performance without relying on cloud connectivity. More recently, Apple acquired WaveOne, a company specializing in AI-powered video compression, which enhances streaming efficiency for Apple TV+ and improves FaceTime video quality—moves that subtly boost Apple's operating margins.
These acquisitions aren't just about enhancing user features; they're about expanding margins and reducing reliance on third-party tech. A prime example is Apple's shift from Intel (INTC) chips to its in-house M-series processors, featuring Neural Engines that power device-side AI. This transition has resulted in estimated cost savings of $75 per Mac, directly contributing to long-term profitability. While these moves may not grab headlines, they consistently deepen Apple's competitive moat and quietly support sustainable earnings growth.
Apple's True Value is Intangible
Apple's valuation is largely propped up by its immense intangible value—brand strength, customer loyalty, and a vast portfolio of intellectual property. With nearly $100 billion in annual free cash flow in recent years, it's easy to see why investor sentiment remains bullish.
The company continues to aggressively buy back its own stock—$107 billion worth over the past 12 months—prioritizing shareholder returns over reinvestment in operations or strategic initiatives. While that's rewarded investors in the short term, it reflects a capital allocation strategy that may not serve Apple as well in the long run, especially as the AI era accelerates. Truly forward-looking companies use excess cash to deepen their competitive moat, not just engineer earnings per share.
Looking ahead, Apple's sustained growth will depend heavily on the continued strength of the iPhone and the expansion of its Services segment. But cracks are beginning to show. The company is under mounting scrutiny for its App Store policies, facing backlash from developers and legal challenges over its fee structure.
More broadly, the tech world is beginning to question whether Apple is doing enough in terms of operational innovation. The heavy emphasis on financial engineering over bold R&D investments could start to weigh on future performance. This isn't the end of Apple's dominance—but it may mark the beginning of a slower, more modest growth phase.
Apple's Fundamentals Hold Strong
Apple's recent investments—including a $500 billion U.S. infrastructure push—underscore its focus on chip autonomy and manufacturing diversification. The company's growing AI data center presence in Texas and its reliance on TSMC's (TSM) expanding fabs in Arizona highlight Apple's central role in the intersection of technology and geopolitics.
At the same time, a more deliberate shift toward increased R&D spending—at the expense of share buybacks—signals a more substantial commitment to long-term AI innovation. Apple's latest quarterly results reflect continued strength: Q2 FY2025 revenue hit $95.4 billion, up 5% year-over-year, with record Services revenue of $26.6 billion contributing to healthy gross margins of nearly 47% and $24 billion in operating cash flow. Active devices reached new highs, supporting around one billion subscriptions—proof of the company's ability to monetize its ecosystem and drive customer loyalty.
Apple's measured, privacy-first approach to AI, combined with strategic supply chain moves and greater silicon self-reliance, helps justify its premium valuation. Still, ongoing innovation and disciplined capital allocation will be critical to sustaining long-term investor confidence.
Is Apple Stock a Good Buy?
On Wall Street, Apple has a consensus Moderate Buy rating, based on 16 Buys, nine Holds, and four Sells. The average AAPL stock price target of $226.94 indicates a 14% upside potential over the next 12 months.
This indicates that Apple stock remains attractive to tech investors seeking a shareholder-oriented management team, with forward-looking strategies emerging amid the current AI disruption. Personally, I see about a 10% annual return as a reasonable expectation for the company in the medium-term future.
AAPL Walks Tightrope Between Risk and Success
In my view, while there are valid concerns about Apple's current position in the AI landscape, I believe management has some long-term plays in motion. The company understandably wants to preserve its shareholder-friendly model, but it also needs to shift more attention toward reinforcing its brand moat in the face of looming disruption. I'm confident that Apple has the resources and leadership to adapt, although at this stage, it's not among the most compelling investment opportunities available. I remain moderately bullish, although initiating fresh positions at current levels may be unwarranted.