AI iPhones could liven up Apple sales
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Until now, Apple chief executive Tim Cook has been rather reluctant to talk about artificial intelligence. During company earnings calls he would only proffer vague statements about thoughtful investment. On Thursday, Cook changed tack. Without being asked, he declared that generative AI was a critical opportunity for the company. The implication is obvious: an iPhone with generative AI capabilities is coming.
Exactly what this will look like is not clear. OpenAI and Anthropic already offer generative AI chatbots via smartphone apps. Apple could offer a more comprehensive service by embedding a third-party AI assistant in its operating system. Or it may be building its own.
Dynamic new products would be welcome. In February, the company launched its long-awaited virtual reality headset, Vision Pro. But the device did not contribute enough to the company’s $90.8bn quarterly revenues to ameliorate a 10 per cent drop in iPhone revenue.
Apple has not had a pleasant start to the year. In March it was sued by the US Department of Justice, accused of presiding over a monopoly in smartphones. It is awaiting the results of a DoJ antitrust suit against Google that could imperil the payment it receives to make Google the default search engine on its devices. Court documents show that in 2022 this was $20bn — equal to a fifth of net income.
At the end of last year, Warren Buffett’s Berkshire Hathaway — one of Apple’s biggest investors — trimmed its stake in the company. Buffett may be waiting for proof that AI can power a new surge in iPhone sales. But take a look at return on invested capital, a metric he is known to be fond of, and Apple appears to be in good shape. The measure of profitability on debt and equity invested is more than five times as high as the weighted average cost of capital. It is also on the rise. By shifting its mix of businesses to services, Apple has kept margins expanding even as sales dip.
In the next quarter, Apple expects revenues to grow year over year once more, albeit at low single digits. The company’s robust free cash flow generation and huge cash pile means it can expand its buyback programme from $90bn to $110bn without breaking a sweat. The nod towards an AI iPhone helped the share price to rise 7 per cent in after-hours trading. More details about the next smartphone phase should propel it further along.
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