Apple can’t afford to sit out GenAI race, says Needham

Investing.com -- Apple (NASDAQ:AAPL) cannot afford to sit out the ongoing generative AI race, according to Needham analysts. In a note published Friday, the broker urged investors to be cautious ahead of Apple’s third-quarter earnings call.

“We do not believe that Apple can remain on the sidelines, without a clearly articulated GenAI strategy and action plan,” analyst Laura Martin wrote.

She pointed to mounting risks from competitors rapidly advancing in AI integration. “By implication, iOS is falling farther behind Android every quarter,” Laura said, adding that this gap poses “existential risk” to Apple, given the iPhone’s central role in driving both hardware and services revenues.

Martin flagged the potential for rising expenses as Apple seeks to catch up. The analyst said it expects the company may announce “a multi-billion dollar/year license deal to have Anthropic or another proprietary LLM build AAPL its own unique and private GenAI infrastructure,” or even raise its capital expenditure guidance significantly to invest in AI infrastructure.

Beyond financial costs, Needham also warned of talent retention challenges. If Apple doesn’t allow its employees to integrate GenAI into its ecosystem, Martin believes that Apple “will lose its best AI employees to META (NASDAQ:META), OpenAI, Anthropic, etc.”

Calls from the press and Wall Street to replace Tim Cook as Apple CEO have been growing louder with each quarter the company fails to present a comprehensive GenAI strategy.

With Apple shares down 14% year-to-date, compared to an 8% gain in the S&P 500, Martin said it’s clear that investors want the company to take action.

The iPhone maker’s current lack of a GenAI monetization stream—unlike Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), which both benefit from cloud-based LLM services—puts it at a strategic disadvantage, according to the report.

That absence, Martin said, may ultimately “result in a valuation discount” for Apple relative to peers. Despite a premium valuation of 27.7x forward P/E, Apple is lagging its peers in both revenue and margin growth.

“We believe that AAPL’s share price will fall once investors understand the investment levels required to catch up with the other Big Tech conglomerates that were early adopters of GenAI,” the analyst said.

Needham reiterated its Hold rating on Apple shares.