Apple risks getting overtaken by bigger AI players, says Needham

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By Ryan Vlastelica

Apple Inc. is by far the world’s largest company, but the trend toward artificial intelligence is poised to upend the power rankings on Wall Street, according to Needham.
 

The iPhone maker lacks a strategy on generative AI and large language models (LLMs) — which powers services like ChatGPT — putting its title at risk, analyst Laura Martin wrote in a Thursday note. AI growth could result in Apple getting overtaken by three other megacaps: Microsoft Corp, Alphabet Inc., and Amazon.com Inc., all of which Martin sees as more established players in the fast-growing arena.

All four big-tech firms are currently members of the exclusive club of companies with valuations exceeding $1 trillion. However, Apple’s market capitalization stands at $2.77 trillion and it accounts for more than 7.2% of the weight of the S&P 500 Index. 

By comparison, Microsoft has a valuation of just under $2.5 trillion, while Google-parent Alphabet is at $1.7 trillion. Amazon has a market capitalization of $1.4 trillion. 

Despite the lead it has over the others, Apple “is not a core beneficiary of the trend toward generative AI because it is not an arms dealer,” according to Martin. She adds that while the company can “protect its best-in-class ecosystem from defections,” Alphabet will eventually overtake it in size, “driven by its Cloud business, generative AI capabilities, and best in class first-party global consumer data.”

Microsoft and Amazon also have first-mover advantages in LLMs, while “late entrants to LLMs are doomed,” Martin wrote. Microsoft, Amazon, and Alphabet have massive cloud businesses that can run their LLMs in a more cost effective manner, giving them a leg up in artificial intelligence, she said.

Both Alphabet and Amazon have outperformed the Nasdaq 100 this year, with gains above 50% and 60%, respectively. The tech-heavy index, meanwhile, has risen 39% in 2023. Both Apple and Microsoft have also posted strong advances, although they have slightly lagged the gauge’s performance so far this year.

Apple fell 3.2% on Thursday, and it has dropped 6.7% over the past two trading days. The weakness came as China plans to expand a ban on the use of iPhones to government-backed agencies and state companies.