Is Apple’s AI Strategy Better?

Apple is now the best performing MAG7 stock since April despite largely sitting out of the AI spending race. Meanwhile Microsoft Alphabet Amazon and Meta are pouring hundreds of billions of dollars into AI. Wall Street now expects some of those companies to see free cash flow turn negative as they keep spending. So, is Apple's cautious strategy becoming a competitive advantage, or is it falling behind in the biggest technology shift in decades? Now to talk about how Apple stacks up against its mega cap peers, I'm joined by Sebert Financial Chief Investment Officer Mark Malik. Mark, thanks so much for being here. >> It's great to be here. Thank you. >> So, why do you think that Wall Street is rewarding Apple right now? >> Uh, well, for for many many reasons now, now especially more than ever, right? uh the the prognosis for the what what was the big driver of tech over the last let's call it a couple of years being of course this AI expansion uh has gotten I wouldn't say gotten cloudy but it's gotten more complicated than it was uh let's say a year ago uh people were able to pick themes and do theme investing within the AI within the big AI ecosystem but that's obviously getting a little bit more cloudy the nuances are getting more complicated Um and then so in this time uh where people are I think a little concerned um and we see stocks the mega cap stocks in tech not necessarily behaving as we would expect them to behave losing momentum trading down on on good announcements and things like that. People uh are are looking for a story that makes sense. Um and uh in the space of tech, well Apple is still a mega cap last time I checked thankfully. Uh but there's a good story over at Apple. Um and uh as we were talking about before, the story about Apple is that there haven't been any stories about Apple and Apple silently uh moved its way to the front of the line. And I think a lot of people are recognizing that right now and they're digging deeper and they're finding a story that's a lot more tangible um and a lot more uh you know focused more on what's going to happen in the near future versus a lot of the tech plays now that require you to have a lot of long-term vision. Will these big capex spends pay off? How are we going to get the re the revenues? So, these take bigger leaps and Wall Street was happy to give them that that latitude over the last couple of years, but the room the room is getting a little bit of crowded now. Uh so now there's this comfort level of going back to Apple where we can always sort of back now we can now rest on units and things like this. Real solid uh strategy playing out. >> And you mentioned mega cap names. I want to stay on that really quick. Apple has watched Meta, Microsoft, Amazon, and Alphabet spend hundreds of billions of dollars into AI infrastructure while they've largely sat on the sidelines. Do you think that Apple is making the right call here? You know, uh that's a really really good question and and being a student of business for as many years as I have been, I've witnessed a couple of uh of of big moves in the markets spec uh particularly companies that go into what I would call like the vertical integration, right? So the idea of having to own the entire stack uh you know from the bottom to the top, right? the hardware through the software through what goes underneath the software and of course the pipes and all that stuff. And so there are these big waves that happen where everyone believes they need to own everything because there's a strategic advantage to owning everything. Um and that sort of makes sense in certain places. Um but in a lot of cases it doesn't make sense and maybe two years ago if we had this conversation we might have thought hey you know you want to have that strategic edge of having your own AI your own the bottom part of the ecosystem. Um and uh there may have been a strategic edge to doing that for Apple but uh in a lot of cases you know Apple may have stood back and said you know what is our real value proposition to our customers right and that's in the phones that most of us carry in the services that they offer um the the userfacing services um and then you start to think to yourself okay do we need to own every bit of the intelligence um ecosystem underneath or do we just are we really is just good at presenting that and making these tools very usable and productive. And that's what Apple is really, really good at. And so Apple has to make a decision. Do I own everything or do I rely on the market and find the best horses? Right? And so they're in a unique place where they can sit here and say, do I like OpenAI the best for this application? Do I like Anthropic the best for this? Do I like Google? or do I partner with a Chinese partner so that I can get into the Chinese market, which is exactly what they did. So now they've made a strategic decision, which was actually pretty smart because now you have people competing uh for to own that AI layer. Uh that means competition, which means uh you're going to get the best for your buck. And so Apple has to decide, can we add anything to that lower layer that can be better than what Google can produce or what open AAI or Anthropic or any of the others in the space and I think they smart it's a hard thing to say because you know corporate egos are very large we know um and uh you know the the instinct is to say we're the best we could do it better than everybody else but the smartest players were the ones that recognize that competition below you is something that you can leverage uh and in this case whether Apple planned it this way or it just happened to end up this way as the players you know propagated across the map um you know time will tell but I think Apple is in a very unique place right now to be able to leverage that not being in that in that layer below uh as well and by the way we see that actually happening at the layer below where you see now a lot of the AI producers decided to vertically integrate right? And buy chips, right? Or try to develop their own chips, their own data centers. Now, there there is possibly strategic advantage, right? Because they need to get access to these chips that are very hard to get. And so they're doing it because they they cannot survive if they don't get the chips from a third party. So they're they're developing their own. But ultimately what you're going to see and this is getting back to my my tale of being in this business a long time um which is you will probably see as you see all these companies you know Google Meta all of them are developing their own chips in one way or another because of the fact that they're very scarce beneath and they want to take the power away from the Nvidas of the world etc. But what you're going to see is if you turn the clock forward, they may develop these chips, but ultimately they're going to spin out those entities because that's not what they're really good at at the end of the day. Uh they're good at the that layer, which is that intelligence layer. Uh but once that doesn't become a strategic necessity anymore, they're better off spending their investment dollars on what they're really good at. And so Apple may have found itself in a very unique place where they can actually leverage all of that fighting that's happening below them and say we want the best for the least amount of money. >> And right now, like you mentioned, Apple has the luxury to sort of sit back and look at these companies. But what if OpenAI were to come out with an AI first hardware? Could that be a real competitive threat to the iPhone or do you think that would be years down the road? >> That's a great question. Obviously, it's a very timely one, right? because we know about this lawsuit uh that's going on right now and it's very much uh about that right so Johnny Ives the legendary at Apple uh designer left and went over to open AI and that every that opened everybody's eyes uh to okay what is open open AI up to everyone assumed that they were going to come up with some sort of hardware device uh because that seems like it would make sense for the evolution of this industry uh and if you're going to hire hire someone, may as well hire the one that's the best. Uh, so he left and so did I think four to 600 other employees ultimately leave Apple, not because of Johnny, but at some point many Apple folks went over to OpenAI, probably for the big money um that they're probably uh they're offering. But it's clear now that they're developing some sort of shiny hardware device and it has been. So it's not news really. Apple is suing them over that very thing. We just learned about that over the last couple of days. Uh whether or they'll prevail or why they're doing it. Well, it's clear why they're doing it. They're trying to protect their intellectual property, which they absolutely should do. They may be using that to leverage their relation because they have an existing business relationship with Open AI. Um, but going back to the last question, right, it it's if we apply the same uh calculus to that question, sure, OpenAI, I'm sure, will do a great job and they've got the greatest designer over there around, but is OpenAI's skill to compete with Apple, uh, you know, with a with a with a with a device Samsung and all the other great device manufacturers that's that are really already best-in-class. Can they really compete? Are they doing this for a strategic reason? Do they feel like they can take more money from the consumer if they're the ones that have the device in the home or whatever? Um, but uh you're going to probably find just like Amazon has found, just like Microsoft has found before them that when they move up the the food chain that it's not so easy, right? So, it's a very different discipline to create the these devices. And I'm not going to say they're going to be unsuccessful with it. But I I you know, if they're doing it as a reference design or to spur that market, that sort of makes sense. But at some point, uh what happens to Apple? I don't think they can compete with Apple in that space. I think Apple's competitors are the usual suspects, which are, you know, Samsung is a very big uh a very big competitor, and these people that already have the footprint in your pocket and in your in your home. Those are the guys I'd be worried about. And I want to stay on this lawsuit really quick. You mentioned more than 400 Apple employees left for Open AI. Do you think the lawsuit suggests Apple is more worried about Open AI than investors realize or is the concern about stolen trade secrets justified? >> I think Apple is very much concerned, right? They should be concerned with their intellectual property. That really is what Apple has right there is their intellectual property. How they make their devices. I know that there's something to do with metal and how they polish the metal and all that kind of stuff. Um, but you know, companies frequently do this. This happens on a daily basis where you have these uh these arguments over intellectual property. They usually don't make the top uh the top line of the uh of the of the press. But in this case, of course, the the the relationship between Apple and Open AI, which has been a tenuous one because they have a commercial relationship already. Um so you know you can use your intellectual property in many ways um to uh to maybe possibly gain a better uh negotiation uh seat with open AI um um or to literally stop them. So maybe they are concerned that Johnny Ies can do some damage to them uh by creating an in-home device. But more than likely um Apple is just protecting its intellectual property like it should. I mean, Johnny Ives was a integral part of Apple's success over many, many years. Losing Johnny Ies was a was a was a loss, a big blow to Apple. Um, and of course, they want to make sure that everyone plays by the rules. At the end of the day, Apple is saying by doing that, saying, "Open AI, stick to what you're good at. Let us do this stuff. This is what we're good at." >> And you mentioned earlier Apple's strategic edge compared to other big tech names. and in the AI arena. Do you think privacy could be a competitive edge for Apple or do you think that's sort of an excuse for why they're behind? >> Um, that's a that's I really it's really good how you just put that question. I think that the edge I don't this is this is a tough question to answer. I believe security is important. I believe in privacy. I think it's all very very important. Unfortunately, we're living in a world where that that's being redefined every day. I see the billboards like you do all around town here in New York. We see the billboards of Apple saying that we, you know, that that our browser is the only real privacy browser. I think that is more marketing at this stage than anything. I think we're all getting more comfortable. I'm not saying it's good and I'm not saying everyone's comfortable with it, but we're all getting more comfortable with giving away that privacy. So, I don't know if it's their edge um their technical edge as much as it is, you know, maybe a marketing edge at this point. So, I don't see that persisting. And there's been a lot of talk about Siri in this AI age. I mean, simply put, do you think that Apple sort of fumbled Siri? >> I think that they have missed a few steps with Siri. Um, I think that Siri was really the first probably I don't know the exact numbers, but I would bet that if we go back that Siri probably had the the lion's share of the addressable market in the personal digital assistant space uh for a bit because it was the first years. I mean, they they did Siri what a decade ago. >> First mover. Exactly. Then everybody moved in. Alexa moved in and Google moved in also. Um and now clearly Siri and we all know because we all try them all. Uh we know that it does a great job at you know sometimes at you know making a phone call for you or asking you questions but it doesn't come anywhere close to what we now expect from even the lowest level of of AI chatting. Um so I think they did miss a few steps. Um, but I think they are still in a position to be the ultimate winner, right? Because now we can see, you know, we were talking a year and a half ago, we talked about AI, we talked about chat bots, right? It's all about chatting with the AI. Now we're talking about agents. And so now everyone is wanting to, yeah, of course, we all want to chat, right? But we all want agents going to work for us. And Siri, at the end of the day, really is in a better position, not as a chat uh, you know, chat box, but more as an agent, right? That's really what Siri should be doing. And uh so now again, as I said, maybe it was by plan, maybe it was by happen stance. It depends on who you ask over at Apple. If I ran Apple, I'd say we planned this all along. But now they get to see the field. They get to see where all these players have lined up. And that puts them in a very unique position to say, "Hey, what do we want the next revision? Where do we want to go with Siri? Do we want to keep going our same path? Do we want to have Siri do more agentic type work?" And we know because of their last development, the WWC, we learned that they really are moving more into the Asian space, right? So now, you know, uh Siri will be able to do other things for you in the next in its next life. Um which it probably requires the partnerships with these other uh AI providers, but now Siri will be able to go out and get you tickets. Siri will be able to do these things that we now hope that agents can do for us. >> And we talked about this before the cameras started rolling. Apple is at an all-time high, right? And they're not spending nearly as much as these other mega cap names on AI. Why are they at all-time highs compared to Meta and Microsoft and those names? >> Yeah, brilliant. Um, you know, $14 billion I think in capex they spent. And I think the the least amongst the uh hyperscalers is like 125 billion, right? Meta is probably the the one that's uh being stingiest with its spending. If you're in a business where you can win by spending more money, then you have to reward the people that can effectively spend more money. And and I think that Meta is in that space. I think Amazon is in that space. Micros, they're all in that space. They have to spend the money to to be relevant or they're dead. It's do or die for them. And so, we're rewarding the ones that spend it as effectively as possible. Now, we're all questioning that model. What's the return on that investment? um not to the point where we've dropped any of these but now the questions are starting to come rightly so right because you can't just keep spending spending spending but in the case of Apple we can't reward them for spending more money we have to reward them for great design for understanding the client the customer at the end of the day that's what Apple is so good at and so as long as they stick to their knitting I think that's why they're getting rewarded now and they're doing what they do so well I know that the the types of growth that we're seeing today are just astronomical But this is this is in line with reality. This is acceptable. Uh this is a fun roller coaster without you know without risking losing your lunch. Um and Apple has that potential growth. We're not betting on a company that is already I mean it it is higher. It is above where I guess the the the probably 12-month targets are right now. But still you don't have to see crazy crazy growth in order to get margin expansion. You don't need margin expansion. you just need to ride whatever their their current multiples and Apple has good prospects because we have the renewal cycles and the stuff that Apple's just really good at. But I think they have a couple things up their sleeves also with hardware. So I don't think they're done uh in that space. I think there's a lot that they can do and they will do in the future um specifically with their new CEO coming in. So there it's an interesting story. U there's a good there's a good thesis for the investment. There's also always been a very solid financial thesis to own this company as well. So we have that now in this world of not understanding the competition, the rapid changing and and going out on binges and the borrowing and the debt levels and you don't have to worry about this with Apple. So I think people are starting to say let's go back to old faithful. We know this company. We know how they're doing. They have a steady hand on the tiller. Uh, excellent management. Again, today it looks even better than it did a year ago because I think they found themselves in a very unique position. >> And you mentioned the new CEO, John Turnis, is coming in on September 1st. Do you think that job number one for him is looking at the AI strategy? >> He's a hardware guy. Um, and most notably, he was the person that engineered um, Apple's own chips. Um, you know, leaving, I believe, Intel and third party producers. Um, so they understand very very well the benefits of of what they need to what do they need to own versus what do they need to go out and get in the market. And so there is a reason why they started putting chips their own chips in devices. And that has probably a lot to do with the processing requirements to handle that final step in AI. I can tell you almost factually that that it has always been on John Turnis' mind even though he was a s hardware guy and we saw the outside of Apple saying oh where's their AI solution? Why don't they have a claw? Why don't they have a chat GPT? But they were silently doing what they knew they had to do which is oh we have to get the intelligence that can work in our device. We need the device to be smart enough to handle that last bit of the AI that needs to happen on the device and lever all that other stuff. So I think it's not new for him to think about this. I think for me I think his biggest challenge is he's stepping into uh very big shoes, right? Um um Tim Cook has been a phenomenal leader. Um he's made the right strategic moves. Um he surrounds himself by great people. So, I'm sure he would tell you it's not just me, it's my great team. Uh, Turnis is part of that team. And Turnis is not as much of a communicator historically, uh, as Tim Cook. So, his biggest I think his biggest challenge is how do I communicate the vision the same way that my predecessor did. Um, and so I think that is going to be his biggest challenge. I think they have been thinking about AI a lot longer than we think. Certainly Turnis has. >> Exactly. And we know that Apple likes to promote internally. So, it'll be interesting to see how John Turnis' expertise and experience will play into his new role as CEO. But turning to July 30th, the next earnings call for Apple. Is there any commentary or data that you think investors should be looking out for? >> Yeah. Um, I go through this every quarter. Uh, because, you know, I I I I like Apple, but I have to do this because I I own Apple. My top few things I of course we're always jotting down what are we going to be listening for? What are we looking for? Uh every quarter we're always saying to ourselves, okay, uh let's uh at least for the last year and a half to two years, we've all been saying we want to know, forget about all the iPhones and how many units and all that other stuff. We want to know what's Apple's AI strategy, right? And I think uh right now I think believe it or not, of course, they never tell us, right? That's the funny thing. But they do keep telling us that they continue to make money and they continue to grow their revenues, they continue to grow their margin. Well, they maintaining their margins importantly um and their gross margins because they're a hardware company. Um and okay, okay, they're also a service delivery company and that is a very important part. So the things that we traditionally watch before we started all this discussion about AI, those are the things that I'm going to be watching, right? Because those are the things that are paying for all this. And so I want to see I want to see expansion of their existing business lines. How are those doing? What are the margins like? These are things that I will be looking. Of course, I'd love to hear what their vision is for uh for AI, but they're not going to tell you that, right? That's what you listen to. That's what you listen to um um Tesla for. Right. >> But do you think if they had a strong AI vision, they would tell us? >> No, I don't think that's their style, right? That's why I said, you know, it's a two different types of Right. So we when we listen to Tesla, we want to hear stories about how they're making money, about how their margins, how many units they've sold, but we never hear that, right? Basically, we hear miss, miss, miss, miss, miss, miss miss, losing, losing, losing. But then we hear the story, the vision, right? And the vision has kept that stock going and growing. Um, and right now you own that stock if you believe in the vision of that company. If you believe in the robots, you believe in all the stuff that that company for now is focused on and you pay that Elon Musk premium for that. Uh Apple has never been that, right? They've always been a we mind our business. This is what we do. This is what we're good at. We don't do anything before we know we're going to make money and we deliver, deliver, deliver, deliver. They don't do that, right? They deliver those things at their announcements. They do those at the development conferences. That is Apple's style. They've always done that. I can I anticipate that they're sure Sure. I'd love to hear them say, "Oh, by the way, we decided, you know, Siri's going to do this, this, and this." They may have give you a little bit of that, but we're not gonna the stock's not going to pop on any of that kind of news. Uh, that's the thing. Okay? And so, the stock will most likely, it won't be fireworks. Uh, we'll just hear that they had a great quarter that they, by the way, growing revenues and and earnings at at the pace that they are right now. The winds that they're getting in China, which is extremely has been very critical for them. their their um navigation of this very difficult trade environment uh from both sides. Our side, it's been tough here too, it's tough over there. How they're managing their uh hardware because they're still a hardware company which means they still need memory, right? So, they have these challenges too, right? Because we know that memory is going up because of AI and that has affected Apple, right? They've announced recently they're going to raise prices on some of their lines. That's because their costs are going up. Apple is in a position to raise prices because we'll pay. Um, but they're going to will want to hear about all that stuff, their margins, how they're managing their margins, how they're managing their supply chains, boring stuff, but stuff that you can sleep at night because it's understandable stuff. Uh, and it's stuff where they can tell you targets and you can think are can they deliver on this target? Can they not? Uh, versus maybe there, you know, all the may that we get with all the other ones. This will probably pay off. It might pay off in 27. No, maybe it's 28. No, maybe it's 29. Um, you know, and you're you're you're you're investing based on hope, which is a horrible investment thesis where here it's not hope. It's about are they executing? Can they continue to execute like they have for so many years, which is why it's a perpetual hold in most people's portfolios. >> And to wrap things up here, if you're bullish on AI over the next five years, should you buy Apple or are there better ways to play that theme? No, that's a great question and I think now what we're seeing again is I think we're starting to see uh you know the big investment dollars initially in the beginning of the cycle were invest in the companies that are coming up with these AI because without the AI nothing works right so it's the it's the companies that were creating the AIs themselves the models themselves then we started to say okay we got to go beyond that let's go into the picks and shovels right um and so we started investing in the picks and shovels uh and then We invested in the picks and shovels of the picks and shovels. Right? So now we're down to the point where we're investing in water coolers. We're investing in, you know, connectors, wires, even commodities like raw commodities that go into this that'll be the benefit from the growth of the industry. We're looking for better ways to take advantage of this wave. This wave is very real um and is not anywhere near over. Uh we have a long way to go here. Um, and so Apple now should very much be considered the same way we look down into the ecosystem for the picks and shovels. But remember at the tip of that ecosystem, what is there talking to you and me? What is there that our eyes can see or that we can hear or it can talk back to us? That is the appliance that Apple owns. They're in a very unique position. They're going to have to play their cards right. There's going to be competition. Open AI is trying to compete with them. Uh, I guarantee you Google, Amazon, they're all probably pursuing devices also. Uh, they're not sitting quietly. You just haven't heard it yet. Um, and we only know about OpenAI uh because of Johnny Ies. Um, and because he moved from Apple to OpenAI and of course because of the lawsuit. >> A lot to look out for this year between the lawsuit and the new CEO. Mark, thanks so much for coming on. >> Thanks for having me.