It seems like every technology company is now talking about artificial intelligence (AI). However, Apple (AAPL 0.34%) remains somewhat tight-lipped on its plans to integrate AI into its business.
That could soon change. Recent reports suggest Apple will unveil a new hardware product, and the speculation is that it's an augmented reality headset. Additionally, Apple steadily introduces new features to existing products that use AI to create a better user experience.
Painting a picture of Apple's plans requires first understanding the company's core business model. Here is how AI can set Apple and its investors up for continued long-term success.
Apple is all about bolstering its ecosystem
Selling smartphones, headphones, and computers is essential to Apple's business. Hardware sales still make up the majority of revenue, about 80% of sales through the six months ending April 1. But services, the other 20%, made up almost a third of Apple's gross profit over that time.
These services include App Store purchases, media, and subscription services like Music and Arcade. Apple makes money on its hardware sales, but the goal is to grow its user base and monetize it as much as possible by getting you to use your iPhone or other Apple device throughout everyday life. You can think of an iPhone as a customer acquisition tool.
There are over 1 billion iPhone users worldwide, and each accessory and device works seamlessly together. For example, you can download a new song to your library on your iPhone, and it will update across your MacBook or other devices. Apple's hardware isn't cheap for most individuals, so someone with an iPhone, AirPods, and an Apple Watch will probably hesitate to switch to another brand once they buy.
Headset incoming?
The iPhone has carried Apple's growth for years. While that's probably not changing anytime soon, Apple isn't sitting on its hands. Forbes reported that Apple could soon reveal a new hardware product, an augmented reality headset.
It will likely start as a niche device; the reported price will come in at around $3,000, something your average consumer may struggle to afford. Apple wants the headset to be a device that users wear throughout their day, even replacing some tasks that people use their iPhones for. While it may not become the next iPhone (or maybe it does), the company has proven its ability to grow hardware categories with products like the Apple Watch and AirPods.
The device's ability to give users an experience that integrates well with existing hardware will be crucial. Remember, every piece of hardware is designed to play nice with other devices and keep users inside the ecosystem.
AI isn't the star, it's the glue that keeps you stuck
Artificial intelligence may not become Apple's front-and-center focus, but it could play a significant role for the company. Apple's most likely strategy is to use AI to augment its user experience, strengthening its ecosystem to make it even more sticky for users.
You've already seen examples of this, such as facial recognition, photo editing features, and more. What if Apple upgraded Siri to give it ChatGPT-like smarts? Or it used AI to better recommend games, apps, music, and movies to users, driving engagement in the Apple iTunes store?
Years from now, your Apple devices might seemingly know you better than you know yourself, perhaps predicting what you want to do or see next based on your daily tendencies. Apple mastered hardware design and built a sticky ecosystem that created staggering success. The next move could be using AI to make its ecosystem an even more integral part of your daily life.
What to do with shares -- today
The AI hype has pushed shares up 30% since January to nearly 30 times earnings. While Apple's potential new headset and AI applications could play a role in the company's long-term growth, it's still very early, so don't tempt yourself into chasing shares at any price. Apple's the world's largest publicly traded company, and dramatically overpaying for the stock could hurt your returns.
AAPL PE Ratio (Forward) data by YCharts
Analysts believe the company's earnings-per-share (EPS) will grow to nearly $9 by 2028. That means investors could see virtually zero price appreciation for the next five years if the stock traded down to its long-term average valuation. Apple is a great business that investors should want to hold more than trade, but the recent hype should push new money to the sidelines until prices come down a bit.
