MW Why OpenAI's latest moves could signal more trouble ahead for Apple's stock

By Laila Maidan

Apple hasn't spent enough on AI infrastructure and risks falling behind as rivals get more creative with their devices

Investors have been concerned about the potential impact tariffs could have on Apple Inc. since the majority of the company's revenue comes from hardware sales. But as they focus on that issue, they might be missing the real risk posed to the smartphone maker: new competition from companies that dominate in artificial intelligence.

One big way to access AI is to download AI apps on smartphones like the iPhone. The number of monthly mobile downloads of ChatGPT's app in March hit 64.3 million globally, up from 4.3 million in May 2023, according to data from Statista. But while app downloads might be enough for consumers in the short term, a more dramatic merging of AI with smartphones is inevitable.

Analysts at TD Cowen said downloading an app is only the first stage in a four-stage process that is expected to integrate AI with hardware devices. The second stage, according to a June 3 note from TD Cowen, is a more direct integration of AI capabilities into phone apps like search and voice tools. The third and fourth stages involve an even deeper integration of AI's capabilities into a device's operating system, allowing AI to access applications like texts and emails. It's in the last two stages that Apple Inc. $(AAPL)$ might be behind, wrote the TD analysts.

As it stands now, Apple Intelligence isn't where it needs to be to meet user expectations, nor is the software that supports it, the TD analysts wrote. And as more capable AI models come to market, they will require better hardware and memory to support them. TD estimated that the integration of more advanced AI models would increase power consumption for smartphones by over 30%, which would mean costly hardware and software upgrades for smartphone providers, including Apple.

But the real risk is that it may open doors for competition since Apple is behind on developing the infrastructure for AI, while other companies are racing ahead. One of those threats could come from OpenAI Chief Executive Sam Altman and former iPhone designer Jony Ive, the analysts wrote. In May, OpenAI announced it was buying Ive's device startup company io. Altman and Ive told the New York Times they were aiming to build "a new family of products" around AI.

See also: Here's why OpenAI is buying iPhone designer Jony Ive's startup for $6.5 billion

Ted Mortonson, managing director and technology strategist at Baird, noted that Apple is dependent on AI integration from companies like OpenAI. For that reason, the company could fall behind if OpenAI develops its own devices that can better integrate with its lineup of GPT and reasoning models.

But the risk goes much deeper. Apple hasn't ramped up enough on data centers, which means the company doesn't have the infrastructure support required to internally run an AI ecosystem like its competitors Alphabet Inc. $(GOOG)$ $(GOOGL)$ and Meta Platforms Inc. $(META)$ , Mortonson said. Those companies also have devices that could compete with Apple's.

Apple's operating system is the best technology for the old world, Mortonson said. It provides its users with stable updates and great functionality. But none of this will be enough as competitors integrate and advance generative-AI tools into their devices, which are models that can create images, text and videos, he added.

"Apple is not a technology innovator, it is a very fast follower," Mortonson said. "Tim Cook is known as the supply-chain genius and that has worked over time. But it may not work in a fast-moving gen-AI environment."

Simply put, people are eager to adapt the latest AI tools. That leads to fears that those who don't will get left behind. As new products with AI integrations come to market, the risk is that Apple will lose market share.

Once gen-AI features become widely available, the rules will have completely changed for smartphone competitors. It might be hard to imagine that veteran iPhone users would abandon Apple. But Mortonson says investors should watch for behavioral changes from social-media influencers to see if they begin pivoting to devices like the Samsung Galaxy or Google Pixel because they offer better creative features. He also suggested paying attention to younger customers who are buying their first mobile phones, meaning they may have never owned an iPhone. They might end up choosing a competitor to the iPhone or even turning to non-smartphone devices like Meta's Ray-Ban glasses.

Product or hardware sales made up 72% of Apple's net revenue for its fiscal second quarter, and iPhone sales alone accounted for 49% of net revenue. However, the risk to Apple wouldn't only be around hardware. Its services segment heavily relies on hardware sales because the company has created an integrated ecosystem. Additionally, a wider adoption of Apple Intelligence could push users into opting to pay for more cloud-storage space, but if people don't buy iPhones, this growth vector is at risk as well.

What could help Apple get back in the game? The TD analysts listed three potential milestones, including the release of a gen-AI software-developer kit, which would allow developers to connect their applications to Apple Intelligence. The tool would lead to wider adoption of Apple's ecosystem and broader use, the analysts said. The second thing investors should watch for is upgrades to Apple Intelligence comparable to Meta's Llama 4 Scout, which is a model TD analysts say "strikes a balance between efficiency and capability."

Finally, it's worth watching to see whether Apple buys a significant AI company to integrate into its ecosystem.

If Apple can successfully meet these milestones, analysts at TD noted that the stock can reach their price target of $275. If it can't, the risk is that the stock could fall to $160. The stock, which closed near $203 on Wednesday, has lagged its Big Tech peers so far this year, falling 19%.

However, Mortonson said the stock is too expensive. It's trading at about 26 times forward earnings per share, with that metric measuring how much an investor pays for every dollar the company is expected to earn. Apple has a two-year estimated compound annual sales growth rate of 5.8%, according to data compiled from FactSet. Mortonson pointed to better risk-reward options in other stocks, including Alphabet, which has a forward P/E of 17.7 with a higher two-year estimated sales CAGR of 10.6%.

-Laila Maidan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 05, 2025 07:52 ET (11:52 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.