Apple’s Slow AI Investment Raises Red Flags as Rivals Race Ahead
As concerns around tariffs and global trade persist, investors may be missing a more immediate threat to Apple Inc.: falling behind in the fast-moving artificial intelligence race.
While Apple still generates the majority of its revenue from hardware—iPhones alone made up 49% of net sales in the company’s most recent quarter—it’s lagging in building the infrastructure needed to support advanced AI. That shortfall could open the door for more agile competitors.
Smartphone users are already embracing AI tools. ChatGPT’s mobile app saw global downloads surge from 4.3 million in May 2023 to 64.3 million in March 2024, according to Statista. But downloading apps is just the beginning. Analysts at TD Cowen outline a four-stage roadmap for AI-smartphone integration, with the final stages embedding AI directly into a device’s operating system. Apple, they say, is stuck in the early phases.
According to a June 3 TD Cowen note, Apple Intelligence—it’s in-house AI initiative—doesn’t yet meet user expectations. And as AI models become more sophisticated, they’ll demand significantly more from hardware. TD estimates next-gen AI could increase smartphone power consumption by over 30%, requiring costly upgrades to processors, memory, and battery systems.
More troubling, Apple lacks the cloud infrastructure to run these AI workloads at scale. Unlike Alphabet, Meta, or Microsoft, Apple hasn’t invested heavily in data centers that underpin powerful AI systems. “Its operating system is great for yesterday’s tech landscape,” said Ted Mortonson, technology strategist at Baird. “But that won’t be enough in a generative AI world.”
The competitive threats are mounting. OpenAI CEO Sam Altman and former Apple design chief Jony Ive are reportedly working on a new line of AI-native hardware, after OpenAI acquired Ive’s startup in May. If successful, their devices could integrate directly with OpenAI’s language and reasoning models—offering users a more seamless AI experience than what Apple currently provides.
Mortonson also warned that Apple is overly dependent on outside AI providers like OpenAI. Should these companies launch their own devices—like Google has with Pixel or Meta with Ray-Ban smart glasses—Apple risks losing market share, particularly among younger or first-time phone buyers.
“Apple isn’t a technology innovator,” Mortonson added. “It’s a fast follower. That works in a stable market. But AI is moving too fast for that strategy now.”
The consequences extend beyond hardware. Apple’s services business—cloud, apps, subscriptions—is tightly tied to iPhone sales. If the company fails to stay competitive in AI, fewer device sales could erode growth in that segment, too.
TD Cowen sees three key moves Apple could make to regain momentum:
- Release a gen-AI developer kit to help third-party apps integrate with Apple Intelligence.
- Upgrade its AI models to compete with rivals like Meta’s Llama 4 Scout, which offers strong performance with low resource demands.
- Acquire a major AI company to accelerate internal capabilities and close the infrastructure gap.
If Apple hits these milestones, TD analysts believe the stock could climb to $275. Failure to do so could drag it down to $160. Apple shares recently closed near $203, down 19% for the year—underperforming its Big Tech peers.
Mortonson, meanwhile, sees better value elsewhere. Apple is trading at about 26 times forward earnings, with a two-year estimated sales growth of 5.8%. Compare that with Alphabet, trading at 17.7 times forward earnings and a projected growth rate of 10.6%.
The message is clear: Apple’s strength in hardware and ecosystem integration won’t be enough on their own. In the AI era, speed, infrastructure, and innovation are becoming the new competitive edge—and Apple has some catching up to do.
