Apple (AAPL): The Quiet Tech Giant And AI Hedge

The Grandfather of Tech

Some of today’s tech giants have been relatively recently rising to the position of the “Magnificent Seven”, for example, Tesla (TSLA +1.05%), Meta (META -2.65%), or Nvidia (NVDA +0.35%).

Others are a little more established, having been forged through the rise and explosion of the dot-com bubble, like Amazon (AMZN +0.86%) or Alphabet (GOOGL +1.34%).

But in a field that constantly changes and which values innovation above all, duration power is valuable in itself. It shows an organization that can not just win from a lucky strike in the right place at the right moment, but a durable institutional advantage built over decades.

Such an example is Microsoft (MSFT +0.58%), which transformed its dominant position in operating systems into a massive conglomerate in enterprise software, cloud computing, video games, and AI.

The last member of the Magnificent 7, Apple (AAPL +4.34%), is similar, having been present since the very beginning of the personal computer revolution, and largely responsible for having made it happen in the first place.

The eternal rival of Microsoft in the PC market is today also the prime competitor to Google in the smartphone operating system market, and still the rival to beat one day for all other smartphone manufacturers.

After years of dominance in the hardware market, Apple is at the crossroads, and will have to demonstrate that it can once again prove all its critics wrong, who have often misread the delayed start of Apple as a failure to innovate.

The Foundations of Apple’s Moat

Revolutionary Innovations

It would take too long to list all the innovations and technological achievements of Apple. Still, a few key points need to be mentioned to illustrate how important the company has been in shaping our current tech landscape by creating or popularizing key new ideas:

• The Graphical User Interface (GUI), the mouse, and the copy-paste function with the success of the Macintosh in the 1980s.
• The iPod popularizing digital music and the presence of the first “iGadget” in our pockets.
• The iPhone, launched in 2007, giving smartphones the shape they have today.
• The iPad, Apple Watch, and AirPods are creating further categories of connected devices.
• The App Store creating a revolution in how we interact with software and locking Apple’s customers in the company’s ecosystem.

Most of these products were the result of the vision of company founder and leader Steve Jobs, at least for most of the history of the company, until he died in 2011, as well as the other, often less well remembered co-founder, Steve Wozniak.

Source: Britannica

These radical changes have given the company an almost cult-like following, with devotees usually ready to stick to its products no matter what, and turn into enthusiastic “evangelists” for the Apple brand.

Source: MacRumors

Hardware-First Strategy

After a somewhat rocky start, Apple progressively turned into the more stable giant of today when Steve Jobs returned to the helm of the company in 1997. Since then, Apple’s strategy has always been hardware-centric, evolving along with technology and building premium computing hardware.

This created the position that Apple is still dominating in the PC market: a premium product for professionals needing superior capacity and ergonomic for tasks like video and image editing, design, programming, etc.

This has led Apple to sell at a higher price and consistently capture a disproportionately large share of the industry’s profit, even with a smaller market share compared to some competitors.

Apple By The Numbers

What made Apple into a multi-trillion dollar company is not the diversity of its product offer, although the offer has grown more diverse over time.

Instead, it is the sheer success of its main offering that has become a status symbol and a central lifestyle component for many of its users.

For example, just in 2024, Apple sold:

• 232 million iPhones
• 66 million AirPods
• 52 million iPads
• 39 million Apple Watches
• 22 million Mac and MacBook units.

The company is also believed to have ~95 million subscribers to Apple Music and ~30 million to Apple TV.

Of these products, the larger price of the iPhone led it to dominate the company’s revenue, with around half of total revenues coming from this one product. iPhone-related revenues could even be considered as larger than half, as a lot of the App Store and other services sales (the second-largest category) are more often than not directly linked to the iPhone.

Source: Business Of Apps

The Future Of The iPhone

Because the iPhone, a concept now almost 20 years old, has been the center of Apple for so long, it raises a question about the future of the company.

Since the death of Steve Jobs, has Apple kept the capacity to truly innovate, or is it mostly running on the innovation of its founder, and failing to keep up? Depending on who you ask, the answer can vary widely.

In any case, a consensus is forming that smartphones are becoming an increasingly mature market.

In the premium segment of the smartphone market, brands like Samsung or Huawei have caught up with Apple and are starting to pressure the company with as good, or sometimes even more innovative products.

Another sign is that the iPhone is introducing fewer and fewer new features for each generation. It is a rather tepid endorsement that the latest model was welcomed with claims like:

The iPhone 17 reminds me why ‘boring’ tech is always best.

This is also true with the design, with even Apple supporters having to admit a lack of change:

Last year’s iPhone 16 mostly looks like the iPhone 15, and the iPhone 14 before it, and so on.

Still, Apple is keeping up even if it is not ahead, with the notable launch of its first foldable design by 2026, bringing to Apple’s users the design already available from Asian smartphone manufacturers.

This is not to say that iPhone will stop selling, but for the first time in two decades, it has become clear that it is evolving in a relatively stagnant design and that the iPhone design (and other smartphones) is somewhat “finished”, with a foldable screen the last step.

So the iPhone should stay the workhorse of Apple, but alone cannot anymore carry the growth expectation as it used to.

Where Growth Comes Next for Apple (AI, Services, Devices, Robotics)

Services: High-Margin Growth Engine

Far from a possibility in the future, services are now the second growth engine of the company, carried by the popularity of Macs and iPhones.

The most important one is the App Store, whose millions of Apps constantly increase the value of the devices themselves. It brings revenues to Apple both from developers paying fees to access it and from taking a cut of any transaction happening in the App Store.

Apple has also expanded into distributing and creating audiovisual content with Apple Music and Apple TV.

Apple Music offers more than 100 million music and other audio titles. Apple TV is used by 30 million people, which is not small, but it is falling behind compared to Netflix, Amazon’s Prime, Disney+, and HBO.

Source: Headphone Addict

This segment is highly profitable, with a margin of up to 70%, but it is unclear how much more it can grow.

Wearables & iPad: Solid, But Not iPhone-Scale

Apple has a lot of devices, but none of them have reached the potential of the 200+ million sales of the iPhone, and often command a lower price tag as well.

So, whether it is smartwatches, earbuds, or tablets, these are smaller markets that either failed to launch for now, or are likely permanently relatively small compared to smartphones, even when compared to all possible connected devices like smart doorbells, etc.

Source: MMR

Overall, it seems that people are already using a lot of connected devices, and that none of them is the type of product able to replicate the success the iPhone had in creating the modern smartphone category.

For a while, the tech industry was considering smartglasses, and augmented or virtual reality (AR/VR) could be the answer. And Apple is present in these markets, notably with the Apple Vision Pro.

 “This is the early innings of AR and it will only get better.”

Tim Cook – Apple CEO

Unfortunately, Apple’s VR headset was too expensive for most gaming applications (>$3,000), and the usage of VR for work tasks is, for now, confined to very rare use cases. A lack of apps, especially any “killer app” that could justify the purchase, has also reduced the potential of the device.

Smartglasses have been a product Apple has long been skeptical of.

“We always thought that glasses were not a smart move, from a point of view that people would not really want to wear them.”

Tim Cook told to the New Yorker in 2015.

More functional smartglasses were revealed by Meta (Orion AR glasses) in 2024, which also said

“These are too expensive for the mass market. It will take years to make them smaller and cheaper.”

So it is likely that while this might ultimately be the future replacement of smartphones, smartglasses are what the smartphone concept was in 2000. Too expensive, too impractical, too complex to manufacture.

What Apple Killed (Car, TV Hardware, AirPower) — And Why It Matters

Over the years, Apple spent money on several secret projects, including a concept of a self-driving car dubbed Project Titan, which was finally abandoned in 2024 after 10 years of development.

An Apple television (a device, not the streaming service Apple TV) was also considered and abandoned. The same fate happened to wireless charging.

These failures or abandoned projects are not unique to Apple, with, for example, a comparison to Meta’s Metaverse or similar failure to launch “the next big thing” by Alphabet beyond its search.

Still, it puts into question the company’s ability for true innovation instead of iterations. This concern has gotten larger as the next big thing for tech companies has arrived: AI.

AI & AI-Capable Macs: Apple’s Quiet Advantage

The development of AI models has so far been dominated by dedicated companies like OpenAI, or companies like Meta.

This is despite an initial good position of Apple with its assistant Siri and claims in early 2024 that its ReALM AI outperformed GPT-4 in Capabilities. But since, Apple AI has lagged behind its competitors on multiple benchmarks.

While other tech giants are burning through hundreds of billions of dollars in building AI datacenters and training ever larger models, Apple seems to quietly sit out the frenzy.

“Apple is a hardware company. Why would they waste money on an arms race which is essentially a money-burning hole when they can just pay the winner to use their tech?”

Still, as a hardware company, and while open source models like DeepSeek might show that AI does not require as much computing power as thought, Apple’s relative weakness in AI development might turn into a positive.

This is because Apple is actually controlling a very large part of the AI PC segment, with Apple controlling the majority of the market:

“Apple is achieving a 10.2% market share in the total PC market and 45% share in the AI-capable PC market.”

Komal Jessop – Market Intelligence Analyst at Canalys

If smaller, less demanding AI tools become more common, it might turn out to be a massive benefit for Apple’s PC sales, the way the popularity of Photoshop and other professional software has boosted its Mac sales for decades.

This seems to be the opinion of Apple, which has quietly built a series of small parameter models called OpenELM.

Overall, if mega investment in AI data centers proves to be the tech industry’s next killer app, Apple might have definitely missed the mark.

But if it turns out that some of this investment was excessive, this would make Apple maybe the only tech stock less affected by investment in AI and the related enthusiasm, slowing down. So it could be a good counterbalance in a portfolio too heavy in AI-exposed stocks, like Nvidia, for example.

And waiting to see who comes out on top might make sense for a company that is at its core a technology integrator and with the patience to do it better than others, rather than a radical developer of new technology.

Robotics: Apple’s Most Interesting ‘Next’?

One application that would make a lot of sense for Apple is domestic robotic solutions. Not only is the company’s brand already trusted by hundreds of millions of people, but its sleek design has been a direct inspiration to science-fiction movie makers for decades.

As robots make lots of progress, this could be the true move into the future for Apple. While people’s demand for more connected devices might be saturating, the possibility of transferring domestic tasks and chores to a robot could be extremely valuable.

Such a product could easily be 5-10x more expensive than an iPhone, and still get plenty of customers lining up for it. Something that Tesla and its Optimus robot is clearly thinking is the case as well, even if the first use case of Optimus seems to be for industrial manufacturing.

The test case will be a tabletop device codenamed J595 that brings together a large, iPad-like display with cameras and a base that features a robotic actuator. 

Such a test is expected for 2026 or 2027, followed by mobile robots and possibly even humanoid models in the next decade.

Bloomberg is also reporting that Apple has recently hired top robotics experts from places like Technion in Israel.

Will this turn in 10 years into another canceled project like for self-driving cars? It is possible. But this seems much more an innovation with the technology closer to readiness, considering China’s Unitree and Hyundai-owned Boston robotics prowess in robot dogs and humanoid robot mobility.

As AI is increasingly close to making voice command a practical option to order such a robot around, and give it extra capacity, this could be a better direction in which to redirect Apple’s ambition.

Mounting Threats

Antitrust Actions

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Apple’s position as one of the largest app stores has made the company somewhat a victim of its own success.

For example, Apple has recently fallen under the scrutiny of regulators in both the US and the EU for its tendency to force app developers and users to use its own payment system.

This has notably resulted in an $800M antitrust fine for Apple and Meta by the EU. It has also been fighting a legal battle with Fortnite’s developer Epic Games over its new 27% fee Apple imposed on app developers when its customers complete an app purchase outside the App Store.

While not dramatic, these antitrust challenges illustrate that Apple cannot grow that much more in its own market, nor can it press its advantage too much to extract more margin from its partners in the App Store.

This only makes the need for new products in a new market more pressing, like a mass-selling AR/VR headset or domestic robot.

China

Another risk for Apple is the quickly degrading diplomatic and commercial relations between China and the USA.

For decades, China has been the primary manufacturer of iPhones, a relationship that has benefited both China and Apple.

Apple has been trying to de-risk this situation, notably with a plan to move iPhone production to India, at least partially for the US-bound iPhones.

But it will likely take years, if not a decade, to move away from the risk of a supply chain shock in case the hostility between the countries escalates. In addition, India is itself occasionally under threat of tariffs by the US administration, due to its close link to Russia (purchase of oil and military hardware).

So as long as trade wars are ongoing, this could negatively impact Apple.

Bottom Line: Apple as an AI Hedge

Apple is often less discussed than the other tech giants, as it has not been at the forefront of exciting new technologies like EVs, AI GPUs, LLM development, or quantum computing.

This is not to say that the company is not still a world leader, as illustrated by its dominant position in AI-ready PCs or the still remarkable sales of hundreds of millions of connected devices in 2024, including a massive amount of iPhones commanding a large pricing premium, or its massive service revenues from the App Store, Apple Music, and Apple TV.

Still, at a relatively high price-earnings ratio, Apple’s current valuation can only be justified if it manages to maintain growth. This is likely to work if at least one out of two scenarios materializes:

• The business-as-usual situation can be maintained, and the growth of a global middle class in developing countries helps the company to keep selling more iPhones and other devices in ever-growing numbers.
• Apple uses technological progress to release a new product with a large enough appeal and/or large enough price tag to restart growth, like AR/VR goggles, smartglasses, or domestic robots.

In any case, the future of AI will have a massive impact on Apple. If controlling its own LLM model and hundreds of billions worth of data centers is essential to the survival of a tech giant, the company could be in trouble.

If this turns out to have been a miscalculation from its rivals, Apple could come out on top.

This makes Apple a good addition to most tech portfolios, bringing some level of diversification from the all-in on AI so many of its rivals are now tied to.

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