Apple Stock Is One AI Breakthrough Away From Its Next Rally

AAPL stock  (NASDAQ:AAPL) has been the weakest performer among its Big Tech peers, rising by just 1% over the past 12 months, while Nvidia is up 40%, Amazon 30%, and Google 20%. The lag is not about hardware or services. iPhone sales have been better than expected, driven as customers have rushed to buy devices ahead of potential tariff related price hikes, while the services business continues to gain traction. The shortfall largely appears to boil down to AI and doubts about Apple’s execution on this front.

Image by Lukas Gehrer from Pixabay

Apple’s Early AI Stumble

Apple rolled out its Apple Intelligence suite last year across iPhones, iPads, and Macs, offering tools such as writing assistance, new calculator features, and image generation. While the launch looked impressive in parts, it has hardly lived up to expectations. Moreover,  Apple’s biggest developer event in June offered little in the way of compelling new AI developments. Its much-hyped more “personal” Siri upgrade which was meant to handle practical tasks such as pulling information from emails and messages to schedule reservations, appears to have been delayed indefinitely.

This stumble has heightened the perception that Apple is lagging rivals at a time when AI has become the defining battleground for Big Tech. On paper, Apple should be well positioned for the AI era. With a massive installed base of about 2.4 billion devices base, deep semiconductor design know-how, and strong on-device AI capabilities, the company has the ingredients to deliver a compelling AI experience. But what will it take for Apple to actually build compelling AI tools?

Apple’s Approach

Google’s latest Pixel 10 devices launched this week with notable AI enhancements, including real-time translation with voice cloning, an AI-guided camera coach, and a more proactive, context-aware assistant. These advances reflect the company’s massive AI investments. Parent Alphabet is on track to spend about $85 billion on capex this year, with much of it funneled into AI data centers, the backbone of large-scale model training and deployment. That’s more than $20 billion per quarter.

By contrast, Apple spent just $3.46 billion on capex last quarter. Yet Apple may not need Google’s level of spending. Its strategy leans heavily on on-device intelligence, enabling advanced AI tasks to run locally on iPhones, iPads, and Macs. This also highlights the difference in business models: Apple uses AI primarily to drive hardware upgrades and strengthen its ecosystem, while Google deploys AI as a core feature of its cloud, services, and advertising. Should you buy or fear Apple stock?

The Case For Big AI Acquisition

Still, Apple may need to make a bold move. The iPhone maker has been slower to recruit the kind of top AI talent that rivals like Google, Microsoft, and OpenAI have aggressively acquired. That’s why a big acquisition could be key – it would bring product, tech and talent and quickly change the narrative around Apple’s AI business. Apple’s largest acquisition to date was Beats for about $3 billion in 2014, a far cry from the scale of dealmaking that could be required today. But with over $100 billion in cash on hand, Apple can comfortably handle it.

Several names have emerged as potential candidates, including Perplexity AI, whose conversational search tools could transform Siri and potentially push Apple deeper into the search market. Mistral AI, another company known for lightweight, on-device generative models that fit Apple’s hardware-first approach. Anthropic, known for its Claude chatbot, could put Apple at the core of the AI market, taking on the likes of ChatGPT given that builds frontier AI models.

How AI Can Drive Apple Stock

AI could also become the key catalyst for Apple’s stock. On the hardware side, Apple Intelligence is currently limited to the latest iPhone 16 and 16 Pro models (plus last year’s 15 Pro), covering well under 20% of the installed base. As Apple rolls out more compelling AI, it is very likely to limit it to its latest devices. This could set up a meaningful upgrade cycle at a time when customers are holding on to devices for longer. On the services side, revenues have already climbed to nearly $100 billion annually, with over 1 billion paid subscriptions, making services Apple’s fastest-growing segment. See our breakdown of Apple’s services business revenues.

Embedding AI into its ecosystem could unlock new premium features, drive higher storage requirements, and drive more recurring revenues from subscriptions. Unlike rivals spending tens of billions on AI infrastructure, Apple can lean on its edge in on-device processing, effectively shifting compute costs to users via hardware and cloud upgrades. AI progress could drive a higher hardware sales and services growth and potentially help re-rate Apple stock higher.

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