We're still in very early stages of AI, says Deepwater's Gene Munster on tech resurgence

Apple's AI Strategy and Future Growth: A Deep Dive

Key Concepts:

• New Siri: Apple's upcoming AI-powered virtual assistant, crucial for investor confidence.
• Reset Bar: Lowered expectations for Apple's AI capabilities in the short term.
• iPhone Growth: Revised expectations for iPhone sales growth.
• Perplexity Acquisition: Potential acquisition target to bolster Apple's AI and search capabilities.
• CapEx Spending: Capital expenditure on AI infrastructure and talent acquisition.
• Mega-Cap Tech: Large technology companies, including Apple.
• Frontier Tech ETF (LOOP): An ETF focused on smaller, innovative technology companies.

1. Apple's AI Focus and the New Siri:

• Apple's senior management is emphasizing the importance of the new Siri as a demonstration of their AI capabilities.
• Gene Munster believes that investor confidence hinges on the success of the new Siri.
• Apple has effectively "reset the bar" for AI expectations, giving them more time to deliver. This lowered expectation could be positive for the stock in the second half of the year.

2. iPhone Performance and Growth Potential:

• iPhone growth expectations have been significantly reduced. Late last year, investors anticipated 6% growth this year and 8% next year. Now, expectations are around 1% and 4% respectively.
• Munster sees an opportunity for Apple to improve its stock performance through:
  • iPhone Sales: Customers returning to the Apple platform and purchasing iPhones.
  • Anticipation for New Siri: Growing excitement for the AI-powered assistant.

3. Acquisition of AI Talent and Perplexity:

• Meta's aggressive pursuit of AI talent highlights the importance of talent acquisition in the AI space.
• Munster suggests that acquiring Perplexity would be a "home run" for Apple.
• Benefits of Perplexity Acquisition:
  • Enhanced Safari Browser: Supercharge Safari with Perplexity's browser technology.
  • Search Product: Gain a powerful search product to compete with Google.
  • AI Tools: Access tools to build on top of large language models (LLMs).
• The acquisition could significantly improve investor psychology and Apple's fundamentals.
• Acquiring Perplexity could allow Apple to replace Google as the default search engine, especially given the FTC's scrutiny of the Google-Apple search deal.

4. Capital Expenditure (CapEx) and Investment in AI:

• Apple's CapEx spending is significantly lower than other hyperscalers (e.g., Amazon, Microsoft, Google).
• Apple's CapEx was $10 billion last year, compared to $50 billion for other hyperscalers.
• Munster believes Apple will signal a commitment to increased spending in the upcoming June quarter report.
• Apple could increase its CapEx to $25-$50 billion, which would allow them to acquire Perplexity.

5. Mega-Cap Tech Performance and Frontier Tech:

• Mega-cap tech companies, including Apple, have performed well.
• Deepwater Asset Management believes that the mega-cap tech companies will continue to do well.
• Munster suggests that smaller companies in the "Frontier Tech" space may outperform in the back half of the year.
• The LOOP Frontier Tech ETF, which focuses on companies with a market cap below $500 billion, has outperformed the Mag Seven and the Nasdaq over the past three weeks.

6. Conclusion:

Apple faces challenges in the AI space but has the resources and time to turn things around. The success of the new Siri is crucial for investor confidence. Acquiring Perplexity would be a strategic move to enhance Apple's AI and search capabilities. While mega-cap tech companies are expected to continue performing well, smaller companies in the Frontier Tech space may offer greater growth potential.