Apple is facing pressure from Wall Street to figure out its AI strategy

CNBC

2 days ago

While its megacap tech peers are bragging about building island-sized data centers filled with Nvidia chips to power artificial intelligence devices of the future, Apple remains largely on the sidelines.
Wall Street is getting concerned.
The iPhone maker is the second-worst performer this year among the so-called Magnificent Seven, with its stock down over 15% as of Tuesday's close. Tesla, down 20%, is the only other member of the group that's lost value in 2025.
Apple has disappointed its users and investors by declining to share more about its AI strategy, despite delaying the next generation of Siri until at least next year. Making matters worse, longtime Apple design chief Jony Ive in May sold his nascent startup IO for $6.5 billion to OpenAI. In the announcement, OpenAI CEO Sam Altman said his company is currently working on new hardware devices.
OpenAI's aggressive move underscores Apple's unclear role in the future of AI and its lack of a clear strategy when it comes to competing. Analysts worry that Apple's position could start to hurt iPhone sales, which are still happening in historic volumes.
"The incomplete AI strategy is still the biggest overhang, but we think Apple still has approximately 1.5 years to effect a compelling solution," TD Cowen analyst Krish Sankar wrote in a note on Monday. He recommends buying the shares.
Don't expect Apple to dwell on its AI problem when it reports fiscal third-quarter earnings on Thursday. The company will likely be too busy talking about the $40 billion in iPhones it's expected to sell, per a FactSet estimate, and its profitable services business. Revenue in the services division is expected to show growth of about 11% to $26.8 billion, more than double the growth rate for the whole company.
Fortunately for Apple, it's built quite the moat against the threat of AI due to high user satisfaction with its products and its ability to lock in customers who own multiple Apple devices. So while AI could threaten Apple's spot as the most important computer hardware maker, the company has still got some time on its side.
Deepwater Asset Management founder Gene Munster says pressure for Apple in AI over the next year is minimized due to the ongoing strength of iPhones, Macs and the Apple Watch. And competitors like Google's Android haven't yet found a killer AI feature, Munster wrote in a recent report.
"With AI, the substance will exceed the hype, and this will be kind of a re-positioning, or a re-ranking of tech leadership," Munster said in June. "It's going to happen, but it's not going to happen this next year."
Apple has already lost an opportunity to capitalize on AI in the eyes of investors. In the summer of 2024, Apple released features that summarized emails and texts, generated images like emoji, and gave voice assistant Siri a visual redesign. It was collectively branded as Apple Intelligence.
However, the defining feature, a more versatile Siri, was delayed earlier this year until 2026.
Analysts initially hoped that the addition of Apple Intelligence might drive a "super cycle," or prompt people who would have typically held off on upgrading their iPhones to purchase new devices for the AI features. But the increased sales never came.
"We haven't seen that materialize in the way that the market had initially expected," said Visible Alpha Research analyst Melissa Otto.
Apple declined to comment.
The vast majority of people who got a new iPhone last year did so because their current device was no longer working, according to a Consumer Intelligence Research Partners poll. Only 13% of people polled this year said they made the purchase for new features, including AI. When polling those who got new phones earlier this year, about 89% of U.S. iPhone owners choose to upgrade to another Apple device, the firm found.
Apple is keenly aware of the future risks. Eddy Cue, head of the company's services business, said as much in a court case earlier this year.
"You may not need an iPhone 10 years from now, as crazy as it sounds," Cue said.
Apple's AI competition will likely come from two main sources. There's Google, which offers Android devices, and AI-powered gadgets that might not even include screens, relying instead on different kinds of input, such as voice assistants.
OpenAI has announced plans to release the latter, and startups have played with new kinds of form factors, such as pins, pendants and smart glasses like the Ray-Ban Meta device.
Google has been aggressively integrating its Gemini assistant into Android. Users of Android 16, the latest version of the operating system that powers Samsung and other phones, can use Gemini to control apps, including Google Maps and YouTube. Users can ask Gemini to create to-do lists based on YouTube app tutorials — capabilities that are currently far beyond what Siri can do.
Still, even Google CEO Sundar Pichai is saying that it may be a few years before any AI-oriented device would challenge the smartphone.
"I still expect phones to be at the center of the experience for the next two to three years at least," Pichai said during Alphabet's earnings call last week.
Apple has to get more aggressive in the AI race, said Needham analyst Laura Martin, on CNBC last week. Martin said Apple is one to two years behind competitors, including Google, in artificial intelligence.
"If Android is going to integrate all the latest Gemini and generative AI, the next time you replace your iPhone — a year from now, two years from now — that Android ecosystem is going to have more and more cool stuff in it, and then Apple starts losing its installed base," Martin said.
Perhaps Apple's biggest challenger in AI hardware will be OpenAI with the addition of Ive, who is credited with helping to design and launch the iPhone, Apple Watch and other key products.
But OpenAI hasn't given any timeline about its hardware launch, or even what it will be rolling out. It will likely take years before a product hits the market, and then the company has to figure out how to manufacture and ship hardware at scale.
When the iPhone was first announced in January 2007, it was a low-volume product for early adopters. Apple only sold 1.4 million iPhones in the first year, most of them in the fourth quarter, a tiny fraction of the more than 1.15 billion mobile phones sold that year, of which over 435 million were Nokia devices. Apple didn't introduce the App Store until 2008.
Four years later, Apple's unit sales had passed Blackberry maker RIM, as well as HTC, an early Android phone maker, and Motorola. By 2011, Nokia's sales had nosedived, and Apple had grown its business to sell more than 80 million iPhones per year.
Munster predicts that OpenAI's device will likely be unveiled next year and would start shipping to customers in 2026. Apple has some time, but the clock is ticking.