In the wake of Nvidia’s remarkable $750 billion gain driven by surging AI chip demand, investors are on the hunt for the next trillion-dollar AI success story. While Apple (AAPL) has often been overlooked as an AI powerhouse, there’s a compelling case for this tech giant’s potential to dominate the AI landscape.
Apple achieved a significant milestone with over 2 billion installed active devices last February. This user base continued to soar, reaching all-time highs across all geographic segments by the end of the June quarter.
The iPhone’s installed base is also at a new record, with an estimated 1.5 billion active devices worldwide. This impressive growth has seen approximately 500 million new active devices added since 2019, indicating an 11.4% compound annual growth rate.
Moreover, Apple’s subscriber base is flourishing, as CEO Tim Cook announced an “all-time revenue record in Services” during Apple’s FQ3 report in August, with “over 1 billion paid subscriptions” growing at a double-digit rate. The company added more than 65 million subscribers in the first half of this fiscal year, and over 300 million subscribers in the past two fiscal years leading into its fiscal Q4.
Although Apple remains tight-lipped about its AI projects, the rumored Apple GPT chatbot is said to rival OpenAI’s GPT 3.5 model in terms of power and capabilities. This project, fueled by millions of dollars in daily investments, holds great potential, especially when integrated into Siri, enabling automation of various tasks and advanced image and video recognition.
Apple’s potential to excel in AI stems from its ever-expanding device base and the increasing adoption of paid subscriptions. The surge of consumer interest in AI, notably with ChatGPT amassing over 100 million active users and 1 billion monthly visits, positions Apple uniquely. Their vast installed base opens the door to over ten times the number of individuals with readily available access to AI.
Apple’s services segment is playing a pivotal role in the company’s revenue and margins. It’s approaching a remarkable $100 billion annual run rate, constituting nearly 26% of the company’s total revenue with a 70.5% gross margin.
All in all, services now contribute 41.1 cents to each dollar of gross profit, up from 34.6 cents just eight quarters ago. The segment’s contribution to gross profit has steadily risen, increasing by 46% from 23.7 cents per dollar in FY18 to 34.6 cents per dollar to date in FY23. As services surpass $100 billion in annual revenue, they could contribute 50 cents to each dollar of gross profit.
This robust services segment is where AI is poised to have a profound impact on Apple, potentially making it a strong AI contender.
Google and Microsoft exemplify the revenue potential of AI subscriptions at scale. For Apple, with its vast paid subscription base, the potential for AI product offerings is substantial. Offering a stand-alone AI subscription at $2.99 per month could generate around $10.8 billion in annual revenue with a 15% attach rate, based on Apple’s 2 billion active devices. Raising the prices of existing subscription bundles by $0.50 per month could add over $5 billion annually.
Apple is heavily investing in developing a conversational AI model that could revolutionize how consumers interact with voice assistants. As it strives to create a sophisticated AI model, Apple is uniquely positioned to monetize and integrate advanced AI into mass-market consumer applications.
Consumer willingness to adopt and pay for advanced voice assistants is evident, with more than 42% of respondents in a PYMNTS survey indicating they are willing to pay $10 or more per month for such an assistant. Apple’s robust user base, flourishing services segment, and strategic investments in AI make it a formidable contender in the ever-evolving AI landscape.
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