Over the summer, Apple (AAPL +1.50%) previewed what some analysts called its most important product since the iPhone: Apple Intelligence.
The artificial intelligence features the tech giant showed off at its Worldwide Developer's Conference in June highlighted the advantage Apple gains by controlling both the hardware and operating system of its smartphones. It's able to seamlessly integrate data and take action across multiple apps. Apple Intelligence will make Siri a much more capable assistant, improve users' communication with generative text and images, and simplify photo editing.
Unfortunately, Apple Intelligence wasn't quite ready to ship to the public when the new iPhone 16 and iPhone 16 Pro launched last month. Users will have to wait for the release of iOS 18.1, which reports indicate is slated for Oct. 28. At that point, owners of the newest iPhones will get a taste of the coming AI capabilities, but it'll still take months before all the features Apple promised over the summer make it to their devices.
The question for investors now is whether they should buy the stock before the broader public starts to see what Apple Intelligence really has to offer.
Image source: Getty Images.
How will Apple Intelligence impact the business?
The biggest impact Apple Intelligence will have on Apple in the near term will likely be on its iPhone upgrade rate. Only the new iPhone 16 devices and the iPhone 15 Pro and Pro Max are capable of supporting these new software capabilities. In other words, only a small percentage of the iPhones in use before this year's release are compatible with the new AI features.
If early Apple Intelligence users find the new features compelling, that could drive more iPhone users to upgrade their devices sooner than they otherwise would have.
While observers won't know how the iPhone 16 launch went until Apple releases its fiscal fourth-quarter results on Oct. 31, the early indications have been mixed. Lead times on iPhone 16 shipments stayed relatively short in the early days of the launch, but remained extended through the end of September, according to Morgan Stanley analysts. Overall, that bodes well for the iPhone 16's sales trajectory.
The slow rollout of Apple Intelligence features over the next few months could result in more steady demand as the case for upgrading grows. That could lead to several quarters of better-than-expected iPhone unit sales. That said, analysts are already expecting that unit sales will increase by 5% to 10%.
NASDAQ: AAPL
Key Data Points
The long-term potential of Apple Intelligence
Apple laid significant groundwork before its rollout of Apple Intelligence, and the tech could form the foundation of another successful services business for the company.
Apple prefers to keep your data on your device. Some Apple Intelligence features require it to offload processing to the cloud, though, which means sending your data to a server. That's how it's integrating ChatGPT into Apple Intelligence. In order to maintain users' data privacy, it built a system it's calling Private Cloud Compute.
Apple could enable developers to build AI apps using Private Cloud Compute to maintain data privacy. That could open the door for Apple to take its standard revenue cut from app sales, or charge for compute, while funding the build-out of its data center capabilities.
Alternatively, the company may maintain control over AI features on the iPhone and charge users directly. Jefferies analyst Edison Lee thinks Apple could charge users $10 per month for its AI features. Considering OpenAI and other popular generative AI services charge even more for premium features, that's certainly within the realm of possibility.
Apple's ability to monetize its artificial intelligence services over the long run holds much more potential than a boost in upgrade rates in the near term. Still, if Apple does surprise investors with higher-than-expected iPhone unit sales on Oct. 31, it could drive the stock higher.
While shares currently trade at a premium valuation of 30.5 times expected 2025 earnings, the stock is worth the price. Given the massive free cash flow the business generates (much of which it's plowing into share buybacks) and the potential for continued services revenue growth fueled by Apple Intelligence and its AI infrastructure, it's worth buying the stock. And while the public debut of Apple Intelligence on Oct. 28 might not have a huge impact on near-term results, it's worth buying before the news as it still holds some upside.
