Warren Buffett, despite long avoiding the technology sector, has made Apple (AAPL -0.35%) the largest holding at the conglomerate he heads, Berkshire Hathaway. No, the Oracle of Omaha didn't pour into the iPhone maker over hype surrounding artificial intelligence (AI). Buffett has owned Apple since 2016, long before the AI narrative was taking shape.
But during the past year, many of Apple's big tech cohorts, such as Microsoft and Alphabet, have been making notable strides in AI. While the Windows developer and internet search giant made several public announcements about their AI ambitions, Apple remained quiet.
Playing coy is pretty standard for Apple -- but this time, it felt a little different. With some skepticism rising that Apple may have missed the boat on AI, recent details over the company's plans have emerged from a Bloomberg report.
Below I'll dig into how Apple may be pursuing AI and assess what this could mean for an investment in the stock.
Slow and steady wins the race
Microsoft kicked off the AI race with a multibillion-dollar investment in OpenAI, the start-up behind ChatGPT. Since the investment, Microsoft has quickly integrated ChatGPT across its Windows operating system -- specifically, in applications related to Microsoft Office and the company's Azure cloud platform.
Alphabet and Amazon swiftly followed Microsoft's move, with each company making splashy investments in an OpenAI competitor called Anthropic. This wasn't entirely surprising given Alphabet and Amazon each compete in cloud computing with Microsoft.
But Apple, which missed out on the cloud revolution, remained suspiciously quiet during the frenzy of AI investments.
Image source: Getty Images
Is Apple moving too slowly?
While Apple hasn't revealed its AI vision publicly, Wall Street analyst Dan Ives of Wedbush Securities has theorized the company could leverage AI capabilities into its App Store. Earlier this month, investors at least got a small preview of how Apple may be making inroads in AI. The company acquired a Canadian start-up called DarwinAI, which develops technology used to identify defects in hardware devices during manufacturing.
Based on Ives's theory that Apple may rely on AI for future growth in the App Store, it makes sense that the company would bolster its quality assurance capabilities in its line of hardware devices -- which have experienced shrinking growth during the past year. Following the acquisition of Darwin AI, a report published by Bloomberg suggested that Apple is in talks with both Alphabet and OpenAI to potentially run their generative AI models on the iPhone.
Keep an eye out for more details
Apple working with either Alphabet or OpenAI was not something I saw coming. The company is perhaps most famous for its relentless commitment to product innovation. For this reason, it has adopted a closed system, developing technology in-house and rarely outsourcing. This is why I remain incredulous over a potential deal with Alphabet or OpenAI.
At the risk of sounding overly dramatic, I think this is a make-or-break scenario for Apple. All of the company's big tech peers have made breakthroughs in AI. This has left Apple in an unenviable game of catch-up -- all while growth stalls.
Working with other AI companies could merely be an illusion. What I mean by that is a partnership could be a way for Apple to stay in the conversation while the company figures out its actual strategy.
This is why I see an investment in Apple right now as potentially a generational move. It's very hard to bet against a company that has such a prolific history when it comes to marrying software to consumer electronics. If Apple is using a strategic relationship with other AI developers as the catalyst for a more meaningful breakthrough down the road, it could be the first chapter of a much-needed comeback story.
However, with shares trading at 26 times forward earnings, Apple stock is more expensive than both Alphabet and the S&P 500. I don't understand why an investor would pay a premium over the broader market and other established AI players -- especially for a company that isn't growing and doesn't appear to have a concrete plan.
Given Apple's long-term success, however, I'll give it the benefit of the doubt -- for now. While I'm wary of buying the stock at its current valuation, I'm equally curious to learn more about any potential relationship with rival platforms. A prudent strategy is to keep a keen eye out for any further details surrounding Apple's AI roadmap and assess the stock's volatility after any news.
If your conviction rises on any developments out of Apple as it relates to AI, it could be worth scooping up shares and holding for the long term.
