BofA's Wamsi Mohan on call to raise Apple to a buy on gains from Alphabet ruling

Key Concepts:

• Apple's search deal with Google
• Impact of AI search (ChatGPT, Gemini, etc.) on Google's search dominance
• Apple's leverage in negotiating search deals
• Apple's potential AI partnerships (OpenAI, Anthropic, Google)
• Apple's role as a platform for AI applications
• Apple's focus on user privacy and data control
• Monetization strategies for AI services on Apple's platform
• Apple's valuation and stock price target

1. Apple's Search Deal with Google and its Implications

• Apple currently receives $20 billion annually from Google to be the default search engine on its devices.
• This revenue represents approximately 20% of Apple's $100 billion services business.
• The recent ruling allows Apple to renegotiate this deal annually, giving them leverage.
• Apple is exploring partnerships with OpenAI and Anthropic to potentially power Siri with AI.
• This competition gives Apple more leverage in negotiations with Google, as they can threaten to switch to alternative search providers.

2. The Threat of AI Search and Google's Response

• There's a growing concern that AI-powered search tools like ChatGPT could replace traditional search engines.
• Google is responding with Gemini, which could augment traditional search or be integrated into Apple's "Apple Intelligence" solution.
• The share of Google searches is expected to decline, but the rate of decline will be managed.

3. Impact on Apple's Valuation and Stock Price

• BofA Securities believes the market had priced in a 50% probability of an adverse ruling against Apple in the Google search deal case.
• The favorable ruling avoids a potential 10% earnings cut for Apple.
• BofA Securities raised its target price for Apple to $260 per share, implying a nearly 13% upside.
• The firm believes the stock should be up about 5% simply because the negative headwind was avoided.

4. Apple as a Platform for AI and Monetization Strategies

• Apple is positioned to be a winner in the AI space due to its distribution capabilities.
• Apple may license AI models and run them on its own servers within its data centers to maintain user privacy.
• Apple could train these models on Apple Silicon.
• Monetization can occur through licensing agreements or through the traditional App Store model, where Apple takes a cut of revenue.
• Apple will monetize AI products through its services business by taking a cut or revenue share.

5. Apple's Focus on Privacy and Data Control

• Privacy is a central tenet for Apple.
• Apple aims to keep user data on its own servers.
• This approach may involve licensing AI models and running them on Apple's infrastructure.
• Apple wants to be the "keepers of users information".

6. Key Arguments and Perspectives

• Steve Kovach: The ruling gives Apple leverage to negotiate better deals with Google and explore partnerships with other AI providers.
• Wamsi Mohan: Apple's stock price should increase due to the avoided risk of an adverse ruling in the Google search deal case. Apple is well-positioned to benefit from the growth of AI due to its distribution capabilities and focus on privacy.

7. Conclusion

Apple is navigating the evolving landscape of search and AI by leveraging its existing platform and negotiating power. The company's focus on privacy and control over user data will likely shape its partnerships and monetization strategies in the AI space. The favorable ruling in the Google search deal case removes a significant risk and supports a positive outlook for Apple's stock price.