Apple Surges 7%, But AI Debate Remains Divisive

Apple's latest event was quite intriguing. The stock price dropped on the day of the event but surged by 7% the next day, indicating a clear divergence in market sentiment towards the company.

The AI segment unveiled during the event didn't offer many unexpected surprises. Apple continues to prioritize practical, incremental improvements over disruptive innovation. The key takeaway was the confirmation of a partnership with ChatGPT. In terms of hardware support for AI features, Apple announced the launch of a private cloud. This means leveraging Apple's own dedicated services to enable a cloud computing model, integrating private cloud + Apple devices + Apple data + ChatGPT to deliver AI functionalities.

CEO Tim Cook laid out five core principles for developing Apple's smart technologies: strong performance, ease of use, seamless integration into product experience, customization, and privacy protection. Apple particularly emphasized customization and privacy protection. When Siri encounters complex issues, it will determine whether ChatGPT is better suited to handle them—such as identifying foods or generating recipes and plans—after seeking user consent. Users won't need to log in to use ChatGPT, their IP addresses won't be disclosed to OpenAI, and their information won't be stored.

This event addressed the primary concern users have about AI: privacy. Apple's focus on customization and privacy protection gives it a unique edge. Unlike its competitors, Apple has access to the largest and highest quality customer data, which is crucial for AI training. Furthermore, Apple users tend to trust the company more than Android users trust their brands, making privacy protection a new competitive moat for Apple in the future AI era.

Other features like rewriting emails or generating images are similar to what OpenAI and Microsoft offer, and thus not particularly groundbreaking. The new hardware offerings were underwhelming, with older devices being fully cyclical. With Huawei's return in the Chinese market, Apple faces increased competition.

This year, the key to investing in Apple lies in whether its cyclical phone business will experience a super upgrade cycle. The last major upgrade cycle, driven by the pandemic, covered iPads, iPhones, and Macs. With four years passing since then, if we consider a 4-5 year upgrade cycle, Apple’s next super cycle is nearing. In such cycles, Apple typically experiences a "Davis Double Play"—simultaneous increases in earnings and the stock's price-to-earnings ratio.

However, there are current obstacles to this upgrade cycle: high interest rates, limited innovation in phones, and pricing. AI features might introduce a paid model, partnering with OpenAI to boost service software revenue and improve profit margins. But pricing remains crucial; users need to experience the product to determine its true utility. In the short term, a significant risk is that the first generation of Apple’s smart features may not be as intelligent as advertised, potentially leading to lower device sales and falling short of market expectations for Apple’s upgrade cycle, thereby putting pressure on the stock price.