The Real Reason Apple Is Going After OpenAI

Meanwhile, more on the Apple uh world this morning. Uh Key Bank downgrading Apple to sell, citing what it calls slowing iPhone builds with prices increases and the lower expectations for next year around Macs, iPads, and wearables. Nevertheless, Apple stock at a high, up about 15% year to date, pushing its market value close to $5 trillion. The other big headline, tech giant just sued Open AI for alleged trade secret theft. Joining us right now is Walter Pisik, Lighthead Partners, co-founder uh and partner. Good morning to you. When you think about Apple these days, um 313 bucks, they will have higher prices for the next round of iPhones. That's true. The demand though for you know um Mac minis and everybody who wants to basically have their their own server in their house has gone up at least wildly thus far. I don't know if you think that's about to change, Walter. >> I mean, I'm one of them. I've got my Mac Mini. Thankfully, I got it before the the gigantic price in increase that um you know, Cook said was unavoidable. Obviously, the company generates a tremendous amount of free cash flow margin. So, it might have been avoidable. It's unavoidable if you wanted to maintain those margins. But look, every year is a new year. There's some new issue that Apple um you know is dealing with. And you know, Tim Cook has done a phenomenal job at managing that. You know, some years he brings China in the last couple of quarters. you may have had some pull forward. Remember, it wasn't long ago we had this tariff scare and there was potentially pull forward that helped the revenue in some recent quarters and obviously China has been huge for them um in the last two quarters. This is Cook's last quarter, right? This is his last earnings call that he'll be on. So now we're in this kind of transition phase which doesn't seem to be getting a lot of attention. You know, we're turning going to be going to turn over to a new CEO. Yes, Cook will be an executive chairman who'll still be involved, but really the day-to-day operations are going to be getting turned over to Turnis. So, we're we're in a transition period here for Cook in a quarter now that is typically, I think, a little bit seasonally weak. If you talk to some of the operators, this is not a huge quarter. It's in advance of, you know, the expectation of new products, including a foldable iPhone, which is, you know, discussed at maybe a a 2,000 plus price tag. Um, so we'll have to see. Every year again is a new challenge. We're coming off a big potentially pull forward couple of quarters. I think it's an interesting downgrade in the context of like, you know, have maybe estimates gotten a little bit ahead of themselves for for the next year or so. >> Walter, here's the question and maybe it's the Mac Mini question or maybe it's the cloud question. In the world of AI, there's one argument to say that everything is going to happen in the cloud. should be more efficient in the cloud, should be cheaper in the cloud on one side. The other side says it's all going to move to the edge. It's all going to get processed on your phone. It'll get be cheaper to process on your phone. It'll be cheaper to process on your your your your Mac Mini inside your house. And that we're all going to want our own private servers wherever we are. Which is it? >> I mean, it's a good question. We'll have to see how it plays out. There's debate on you also inject the open models aspect of this as well right running an open model on your uh on your local whether it's PC phone watch or then ultimately device up to this point the open models when they get good convert to closed models and they're looking for payment even the you know if you look at the etmology of of open AI it was theoretically supposed to be open Facebook you look at some of the models in China starting open and then maybe closing um to get money and then the question is are those local models mod that you're referring to going to be good enough. The local models that I try to use on my Mac Mini are not, you know, even close to being as good as Claude um or as fast as Claude. Now, there's some management of cost that balances that where maybe you say like, okay, it's not good and it's not as good as Claude, but I don't need, you know, the high value of Claude all the time and I can do a lot of these tasks. Now, let's go take it to Apple and what you're referencing. Being able to use the information on my phone and having a local model on my phone to do things with my personal information. That's where Apple's pitch is going. Run it on my phone, use the access to iMessage that you, the user, will not want to, you know, send into the cloud for analysis. And and that's the type of, you know, early benefits of AI that Apple thinks can drive more more loyalty rather than less loyalty. if they're wrong and that local model isn't enough and people still want to go out to Gemini, still want to go out to Claude, that just puts them at risk. And then I'll take it one step further, uh, Andrew, you know, if you talk to Qualcomm, the guy who's helping a lot of the competitors to Apple design the 40 or so new designs where they want you to get to stop staring at your phone and interact with whatever Johnny I is is developing for OpenAI. that local model on the edge may in fact reduce your usage of the phone, right? Because that analysis is occurring on devices that are off your phone. >> Well, let's go there for a second because uh on the screen right there, we say Apple files suit against Open AI. Uh, of course, it's caused a lot of conrnation, drama online and elsewhere, even with Elon Musk over the weekend and Sam Alman back and forth. Uh, what is your expectation that that lawsuit will result in? Meaning you look at that and say, "Oh goodness, uh, OpenAI will whatever they're building, whatever Johnny IV is building, this has now been delayed a year. So Apple has, uh, bought itself a year or something like that." Or do you say, you know what, this whole market is so open and wide and people are going to come up with all sorts of devices in the next year anyway. I mean, you don't sue someone you're not worried about, you know, and on the media side, you know, when we meet with these smaller companies, the ones that are, you know, potential vi, you know, copy copyright violation, no one gets worried about sued if they're not going to have an impact. So, obviously, they're concerned about this impact. And again, going back to Qualcomm as a player in this market, you know, there's companies that, you know, help to uh enable some of these new devices. I think they realize that existential risk as we're going through this AI transition. Does it change how we all interact with our information? Um, and obviously they want to be the ones that give you the glasses or the AirPods or or the, you know, pendant or whatever it is, um, to interact with with your information and any way they can stall someone that might be a competitor to theirs. Obviously, litig beyond litigation. They've done this, you know, in the past. >> Most importantly, Walter, at $313 a share right now, uh, would you buy it? I mean the the PE multiples kind of at a peak. Does that matter anymore for some of these big names? It could be just kind of some of the rotation out of the more traditional AI names that are spending versus Apple that is not really spending in terms of capex um on AI. I mentioned before you're going into a softer quarter. There was probably pull forward um in terms of some of the purchases in in in the March quarter. It seems like those 27 estimates, it's going to it's going to hinge on how big is this foldable phone. I mean, Andrew, are you going to pay 2500 yourself for a foldable phone? I'm going to get one just because I have to be able to talk about it, but like how many people are going to spend that much for a foldable phone that hasn't been a huge hit um when their competitors have come out with it? >> Is that a yes? Is that a yes you'd buy it or >> No, Joe. Sorry. Sorry if I wasn't clear. >> No, I would not. >> I'll tell you why I'm asking. Because Key Bank, we started the the whole the whole story with Key Bank >> going to a sell with a $250 target. So, >> they had a buy until October of 2023, >> three years ago. >> They went to a neutral because of valuation at $160 $170. >> Yes. >> So, it's up 80% from where they went to a neutral and didn't like it. And now they're going to a sell uh with a 250 price. So take it for what it's worth. That's Key Bank. If you want to listen to them, fine. Cityroup at the same time went to 365. They had they had a target of 315, I think. Uh and they were right. And then they went to 365. So who were you? Key Bank or or or City. The right answer is Cityroup. Um >> I got out of I mean I used to have a cell. I got out of the way when during this whole AI hype all along that that time. I was like, look, Siri is still not good. AI is not happening. But people were still >> for a while too >> in the past. I've had a neutral more recently and I had a buy before that. I mean I've been all across the spectrum show on this one. Um so so right now look they you can't deny the the strong position that they have in the market and their ability to to succeed from AI but you also can't deny that we're going through a major transition where AI it offers a new opportunity in how you're going to get your information. It doesn't happen overnight. Clearly that doesn't happen because they're years behind and they certainly haven't lost share at all. But at some point as you get to this the stuff we were just talking about the agentic the stuff that you're going to use your phone less. Can they play you know a major role? You know the jury I think is still out. You have a new CEO. You've got a couple of quarters of digestion. You know, I don't know if it's it's I wouldn't say it's a short at this point, but but certainly, you know, given the run it's had, >> if it gets to 365, it'll be a$5 trillion company. About well above 5 trillion. >> I mean, I remember when everyone thought a trillion was hard to get through. just these trillion numbers don't seem to matter in terms of of caps on on these stocks anymore,