Bernstein analysts said Thursday that Apple (NASDAQ:AAPL) “appears serious” about building its AI expertise, particularly when it comes to on-device AI technologies.
Although Apple's precise strategy remains opaque to external observers, the company is reportedly exploring various product integrations.
These explorations include incorporating AI into Apple Music, Xcode, Pages, and Keynote, alongside an internal feature known as “Ask for Apple Care.”
Further, while the iPhone maker is developing its own large language model (LLM) called Ajax, it is concurrently engaging in discussions with potential partners such as Google (NASDAQ:GOOGL), OpenAI, and Baidu (NASDAQ:BIDU) to leverage external LLMs.
“We believe that iPhone 16 will at minimum offer similar AI features to the Pixel 8 and Galaxy 24,” Bernstein analysts said.
“We expect most AI features to be unveiled with the iPhone in September, as opposed to at WWDC, consistent with other key software features like Dynamic Island, Siri, and Facetime, all of which were introduced at the time of phone launch,” they added.
The investment management and research firm identified three primary avenues for Apple to monetize AI, although each comes with a “cannibalization risk.”
Firstly, by introducing AI-enabled features in the iPhone 16, Apple could potentially boost hardware sales, with even a 1% increase in refresh rates possibly leading to an 180 basis points rise in incremental revenues.
Secondly, the company could capitalize on AI-driven search enhancements through its advertising platform, “assuming AI search is on net incremental to traditional search,” Bernstein noted.
Lastly, Apple could also boost revenue by charging a take rate from its AI apps.
“We note that on-device AI is likely to have the most immediate impact on Apple’s financials, but its impact may be more ephemeral,” said Bernstein’s tema.
“The revenue impact from AI search and Apps is less certain, given we are in the early innings of monetization models for AI, but one or both could be potentially significant (and growing) over time. A 10% increase in advertising revenues and Apps would add 100 bps and 130 bps respectively to Apple’s 2024E gross profits.”