Koshiro Kyota
Dissertation
I recommend a ‘Sell’ rating for Apple (Nasdaq: AAPL) primarily due to three factors: signs that their AI efforts may be lagging behind those of competitors, stagnant growth, and a higher valuation multiple than Google.
A brief Descriptive
In April 2010, it was announced that Apple had acquired a startup. Although the terms were not made public, it was reported at the time that “the deal was potentially short from Apple’s perspective.” And yet, Apple had bigger intentions. They saw the potential for the acquisition to change how consumers interact with their devices and continue to widen the technological gap between the iPhone and the rest of its competitors.
What was the name of the company that Apple acquired? Siri Inc.—A personal assistant for the iPhone.
Fast forward to October 2011, and an Apple executive Phil Schiller is on stage for the keynote speech. Notably absent was Steve Jobs, who was in the final hours of his battle with pancreatic cancer. Although Jobs’ ill health took its toll on the company, the iPhone 4S had just been introduced to the world. Keynote attendees were excited, eagerly awaiting other announcements. Back then, Apple always had audiences on the edge of their seats.
On stage, Schiller pondered the potential of technology. He noted:
For decades, technologists have teased us with the dream that you would be able to talk to technology, and it would work for us. Haven’t we seen this before, time and time again? But it never comes true.
The rumor, hinted at pushing the limits of technology, piqued the audience’s interest.
Schiller then formally introduced Siri to the world. Interacting with technology through speech is no longer a dream, it is now a reality. Participants were impressed with Siri’s ability to respond to text messages, find directions to specific locations, retrieve current weather forecasts and recommend restaurants. Siri is no longer a third-party app. Now it was a direct integration into iOS. Apple executives called it “the best feature of the new iPhone” and hailed it as an “intelligent assistant” that helps you get things done.
Apple’s dilemma
So what does Siri’s story have to do with Apple today? In a way, Siri was the world’s first taste of artificial intelligence. After all, Siri’s main selling point was that you could now interact with your iPhone using conversational, natural language. Gone are (supposedly) the days of broken and limited syntax for voice recognition. Instead, users had the ability to interact freely and naturally with their devices.
Now, does this sound familiar? Does this sound like many of the technology trends that are buzzing in today’s headlines? Absolutely. It sounds a lot like the AI applications that are taking over today’s news.
It is worth noting that Apple was so far ahead of the rest of the world in terms of AI capabilities and use cases but failed to capitalize on its early advantage. We’re talking about a company with thousands of software engineers, billions upon billions of dollars on their balance sheet, some of the brightest minds in Silicon Valley, and several years of head start. Still, they were unable to invest.
What proves their inability to capitalize on their early advantage is the recent news that Apple is in talks with Google (NASDAQ:GOOG) to use its Gemini AI model for Apple devices and software. Is. Apple, realizing the need for urgency, is acknowledging that its AI efforts haven’t kept pace with its competitors. Surprisingly, when the news broke, Apple stock rose as much as 2 percent before cooling off slightly.
Contrary to what the market believes, it is my opinion that this is negative news for Apple. Assuming this partnership becomes official, Apple may be signaling that their AI efforts are not on par with their competitors. That’s troubling given the amount of weight markets are putting on big tech’s ability to compete in the AI race.
The partnership with Google continues a risky trend for Apple, especially with its large-scale projects that have the potential to reach new and larger markets. For example, it was reported just a few weeks ago that Apple canned “Project Titan,” the team tasked with building the Apple Car. The project started in 2014 and has had a rocky history. The team churned through management and various leaders throughout its life and employed about 5,000 people at its peak. When finished, the struggling project still employed 1,400 employees and had burned through $10 billion in total. Apple, as popular and well-capitalized as they are, just couldn’t pull it off, or even come close.
Basically, Apple started and fell short on cars. And now it appears that Apple is lagging behind in its ability to compete in the AI arms race — choosing instead to license technologies from a rival. They are starting and possibly falling short in the biggest markets. It’s an alarming trend for a company that, because of its vast size, needs spectacular revenue from any new product line just to barely move the needle.
Value
The market is largely valuing the big technologies on their position in the AI arms race, and assuming that all other business functions are more or less ancillary to their AI functions. Microsoft (NASDAQ:MSFT) illustrates this trend well. On January 23, 2023, the day of their $10 billion investment in OpenAI, Microsoft’s EV/EBITDA multiple was 18.3x. Today, Microsoft’s multiple is 26.4x. Of course, this multiple expansion has helped the overall market strengthen, but it goes without saying that Microsoft has also been rewarded for their lead in the AI arms race.
Searching for Alpha
Assuming the same premise that AI is the future and determines much of the basis for evaluating big technology, there’s no reason why Apple should be favored over Google. After all, Apple has essentially conceded to Google in the AI arms race.
According to this paper, Apple and Google’s valuation metrics are starting to converge. A year ago, Apple’s EV/EBITDA multiple was 19.1x, while Google’s was 13.8x. Today, the delta between multiples has narrowed. Apple currently trades at 20.1x EV/EBITDA compared to Google’s 17.6x.
Furthermore, not only does Google have the upper hand when it comes to AI, they are growing rapidly. Google’s forward revenue growth and forward EBITDA growth are 10.2% and 12.8%, respectively.
Searching for Alpha
This beats Apple’s forward growth metrics of 1.5% and 2.6% by a wide margin.
Searching for Alpha
Add each of these factors together, and it seems unreasonable for Apple to command higher valuation multiples than Google.
I’m sure we’ll continue to see Apple and Google’s multiples converge — and eventually Apple’s multiples will change as Google’s sinks below. Apple’s absence from the AI race will become more and more apparent as time goes on. They will no longer be at the forefront of technology. Instead, Apple will be at the mercy of its competitors for access to its technology.
Risks
With AI looking outside Apple, the biggest catalyst for their future will be the Apple Vision Pro, which is, in their own words, “the most ambitious product Apple has ever created.” Vision Pro is Apple’s ticket compatible. Of course, at its current price of $3,499+, it’s far from mainstream. But if their recent launch has shown anything, it’s that their most devoted and loyal customers are at least open to new technology.
In many ways, the Vision Pro has the potential to be as transformative and game-changing as the iPhone. It challenges the status quo of what computing has looked like in the last 15-20 years. However, if Vision Pro fails to reach the mass market in the next few years, Apple may once again lose its opportunity as it is only a matter of time before competitors jump on the same train.
Another risk for bearish investors is the possibility that Apple will continue to trade at a premium to its peers because of its positioning as a desirable, luxury brand. It’s possible that these brand dynamics are responsible for the difference in valuation multiples between Apple and other big tech players. After all, there are very few brands in the world that command as much support and devotion as Apple. This strong backing can help increase Apple’s value, even during times of growth and uncertainty within the company.
Result
What Apple has built up to this point is extraordinary and nothing short of incredible. For years, he has been the darling of Wall Street. And The main road. Wall Street in the sense that they have provided incredible returns for investors, and Main Street in the sense that they are backed by millions and millions of consumers. However, Apple’s throne is starting to show signs of weakness.
Rumors of their potential partnership with Google to use their Gemini AI show that Apple’s AI efforts may be lagging behind rivals. Pending any unforeseen developments, it appears that Apple has waved the white flag — signaling that it will no longer be at the forefront of technology, but at the mercy of other major tech players. .
The revelation comes at a time of stalled growth for the company and casts a shadow over its future. Add in the fact that Apple currently commands a higher price multiple than Google — the very competitor they would license AI services from — and it’s hard to justify their current price. Therefore, I recommend a ‘Sell’ rating.