Why Apple’s AI Announcement This Week Is a Big Deal… Dear Leah, On September 9, Apple Inc. (AAPL) sought to wow audiences with a splashy announcement of the iPhone 16. The new AI-focused device will be able to sort messages, offer writing suggestions and use a more capable Siri virtual assistant. The new smartphones will also be powered by the latest A18 chips – a design 30% faster than its predecessor. However, the presentation seemed to miss the mark. Google searches for iPhones remained relatively muted… news outlets dedicated little effort to covering the event… and investors responded with a collective yawn. Apple's stock traded precisely flat for the day. So, why the lack of enthusiasm? Well, part of the reason could simply be because Apple has been a bit behind the curve when it comes to the AI Revolution. But that's nothing new for Apple. Contrary to what most people think, Apple has never been at the bleeding edge of technological innovation. What makes Apple, Apple, quite frankly, is its ability to perfect technology for the masses. So, despite the muted reaction from the media and the public, the news that Apple is integrating AI into its phones is a big deal, folks. More importantly is the news that, rather than outsourcing the work, the world's largest company will build its own AI system in-house. If You Build it, They Will Come... Apple's decision to build its own AI system is significant because not every tech company is dedicating the resources to do so. Microsoft Corp. (MSFT) is largely relying on OpenAI to power its generative AI systems. The next-gen Alexa smart speakers from Amazon.com Inc. (AMZN) will use Anthropic's Claude to work. And the use of third-party AI systems is even more prevalent among smaller players. Some startups have even been accused of passing off other AI chatbots as their own, a process known as "wrapping" third-party software. And that means the world's most valuable company will soon become yet another big buyer of the chips needed to perform the massive number of calculations required to train AI models, and an even larger buyer of the low-power AI chips needed to run these applications on phones. In other words, the world's most valuable company (Apple) is now dedicated to pouring billions of dollars into the chip companies into the chip companies that are making the AI Revolution possible. It's hard to overstate the dollar amounts. We all know that training new AI models is steep. OpenAI reportedly spent $100 million to train its initial GPT-4 model, and Google's Gemini Ultra reportedly cost almost twice as much. Apple will likely spend even more, given the steadily rising costs of each new generation of large language models (LLMs). But the biggest cost of LLMs eventually comes from running them. Many believe that OpenAI spends almost $7 billion a year on inferencing (i.e., running existing models), or 70 times more than they spent on training GPT-4. And one survey by an IBM product manager estimates that 95% of AI spending is on inferencing versus training. Who Benefits This will create a bonanza for companies like Arm Holdings PLC (ARM), which excel at designing the types of power-efficient AI chips that battery-constrained smartphones need. Apple's iPhone 16 will offer on-device AI as a first port of call (rather than sending queries to offsite data centers), and the Arm chips (namely, the A18) that run these queries will reportedly bring in twice the royalties of previous generations. But once again, NVIDIA Corporation (NVDA), the AI chip leader, will also benefit. In addition to onboard AI capabilities, the iPhone 16s will send more complex queries to offsite data centers, where they will be processed by higher-powered chips. NVIDIA is a leader in this field, and the iPhone's performance demands will almost certainly funnel Apple's investment to this GPU maker. To illustrate NVIDIA's importance, I want to remind you of the story I told you about in Friday's Market 360. In 2023, Meta Platforms Inc. (META) quietly launched next-generation smart glasses in partnership with Ray-Ban. Users can snap a photo of their surroundings, and within two seconds, the sunglasses' miniature speaker will tell the wearer what they're seeing. It's become a surprising hit among the legally blind. The magic of its usability comes down to speed. Previous generations of image-recognition software could take five seconds or more to analyze an image… and often produce wrong results. Meta's latest LLMs, known as Llama 3, are now the fastest current-gen products on the market. That's what allows the Meta/Ray-Ban smart glasses to capture an image, send it to an offsite data center, and receive speaker instructions in less than two seconds.
As I mentioned previously, this two-second rule is everything when it comes to usability. Web developers have long known that most internet users will leave a site that takes more than two seconds to load, and operating systems use a two-second rule with tasks like application switching and launch times. That's creating incredible demand for companies like NVIDIA, whose chips can shave off fractions of seconds from AI calculations. One study by noted website Tom's Hardware found that Nvidia's flagship H100 AI chip can complete tasks in 1.7 seconds – compared to 2.5 seconds for an equivalent Advanced Micro Devices Inc. (AMD) chip. So, even if NVIDIA's chip isn't 3X faster than rivals', they still charge roughly 3X as much because speed is so essential when milliseconds are of the essence. Still the Market Leader That's why, as I explained to my Growth Investor subscribers, I wasn't nervous when NVIDIA sold off sharply in the wake of its latest quarterly earnings announcement. In fact, I saw it as an incredible opportunity to buy the dip. Here's what I said in the wake of the company's second-quarter earnings news: The bottom line: While Wall Street was clearly looking for more of a blowout result, I am ecstatic with NVIDIA's results. This stock is a game changer, and you should just own as much as you can – and that means today's dip is a buying opportunity. So, even though NVIDIA was down over the past month, it was clear to me that this was a technical selloff that was completely detached from reality. And sure enough, the stock roared back with a vengeance this week, with the stock up more than 15%. The Bottom line Apple's iPhone 16 news is great for iPhone fans. Some are speculating that the Apple Intelligence rollout will spur a supercycle of iPhone upgrades and breathe new life into the company's device sales. Others are pointing to Apple's entrance into the race as a watershed moment that will serve to mainstream AI in the consumer consciousness. All that remains to be seen, of course… But if that does come to pass, then the financial benefits will also accrue with the chipmakers that hold a monopoly over the technology Apple needs. That starts with NVIDIA, folks. As I said yesterday, it's just an incredible company with stunning fundamentals. We're currently up by more than 2,700% on our position in Growth Investor – and I think there is a lot more money to be made in the future. But this is just the beginning… The AI Revolution is going to change life as we know it – and faster than you may realize. That's why I created a new report with details on nine world-class AI and quantum computing stocks to buy now. Go here to learn how to get your hands on this report now. (Already a Growth Investor subscriber? Click here to log in to the members-only website.) Sincerely, | .png)
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