Artificial intelligence (AI) has opened up a whole new realm of possibilities for new products and services which Apple (AAPL 0.38%) can launch. Its newest iPhones will have the functionality necessary to take advantage of the company's new AI features, which it is broadly referring to as "Apple Intelligence." It's just the catalyst the company may need to trigger a big upgrade cycle for its phones.
But a boost in iPhone sales is just one part of the equation. There could be another catalyst for Apple thanks to AI, and that's on the service side of things.
NASDAQ: AAPL
Key Data Points
Apple may charge a subscription fee for certain AI features
Not all AI features are created equally, and premium options could require users to pay a recurring fee for them. Many analysts believe that the company could charge a fee, potentially as much as $20 per month, for premium AI features.
Apple users, they argue, have become accustomed to paying for premium features and services through the company's growing and vast ecosystem. New and enhanced AI capabilities could be part of those premium features. Chatbots, for example, such as ChatGPT are free for users, but for people who want a premium experience, including faster and better access, that requires a subscription.
Apple Intelligence encompasses many of the types of features that people can do with chatbots today, such as drafting emails and creating images. Apple's Siri assistant will also get an upgrade due to AI. The company has recently unveiled Apple Intelligence, and all the features likely won't be known until next year, and by then, consumers may have a better idea as to which ones may be free versus which ones may require a subscription.
Service revenue is increasingly important for Apple
Over the years, Apple has been expanding its services business to include music, news, streaming, podcasts, fitness, and other services. AI can enhance those existing services, but it can also be a stand-alone service as well, acting as an assistant for users.
Services are an important part of Apple's business because, while a user may hang on to an iPhone for multiple years before upgrading it, for services, there's always the need to pay an ongoing subscription to ensure there is no interruption in use.
In the company's most recent quarter, which ended on June 29, revenue from services totaled $24.2 billion, and it increased by 14% year over year. That's a much higher growth rate than the modest 2% increase the company experienced in product sales, which totaled $61.6 billion. Today, service revenue accounts for 28% of Apple's top line. Five years ago, the company's quarterly revenue from services was just $11.5 billion, and it accounted for 21% of all revenue.
The services business has become much more important to Apple in recent years, and AI can potentially accelerate its growth in the near future.
Is Apple stock a good buy?
Shares of Apple dipped recently on the news that billionaire investor Warren Buffett has been selling the company's stock. And while that may sound alarming, it's not a reason for investors to worry, and it certainly doesn't alter the investing thesis behind buying Apple stock.
At more than 30 times earnings, Apple isn't a cheap stock to own, but with a strong customer base and the potential for AI to transform and accelerate its business, now may be as good a time as any to add the stock to your portfolio. There may not be just one but multiple catalysts coming for the business due to AI, and as long as you're willing to hang on for the long haul, this can make for an excellent growth stock to buy today.
