Apple probably needs some fresh blood to get disruptive innovation going.
Since Apple $(AAPL)$ co-founder Steve Jobs' passing in 2011, innovation from the tech giant can be summed up in one word: "incremental."
Apple's latest products include the iPhone 16, a new Apple Watch, upgraded AirPods, and a refined Mac Mini. Unfortunately, don't expect much improvement in these offerings, which are being introduced at the company's "It's Glowtime" event on Monday.
Importantly, Apple's latest products will likely be the first to incorporate Apple Intelligence, which the company presented at WWDC in June 2024. This time, we are not expecting any revolutionary new products or product changes. The iPhone 16 will likely have better cameras, a little more battery life, a slightly better screen, and perhaps a few nifty AI features (including an improved Siri).
That's fine for now, but at some point, Apple needs to start truly innovating again if its stock is to outperform. Especially given the stock's current valuation (trading at 33 times 2025 earnings estimates), it's concerning and possible that Apple's stock could go sideways for many years if it doesn't return to double-digit revenue growth soon.
Why do we have so little confidence that the iPhone 16 and Apple Intelligence will lead to amazing growth for Apple in the next year or two? Let's break it down:
First, Apple must grow the ecosystem beyond the platform that Jobs built. Jobs was one of the greatest executives, technologists and leaders of all time. Jobs created nearly all of Apple ecosystem that we know today, and this ecosystem has propelled Apple's success ever since.
Apple's products launched under Jobs' leadership (the Mac, the iPod, iTunes, the iPhone, and the iPad) continue to generate the vast majority of the company's revenue and profit (90.56% of Apple's revenue in the second-quarter of 2024 to be precise). Current CEO Tim Cook has had the good fortune of nurturing and monetizing that ecosystem ever since.
While the promise of what Apple Intelligence could be is extremely exciting, it's questionable whether Apple will build a revolutionary AI-based iOS anytime soon. Apple doesn't have the computing power in place to produce really amazing AI on its own, which is what Amazon.com $(AMZN)$, Microsoft $(MSFT)$, Alphabet $(GOOGL)$, Meta Platforms (META) and others are racing to do right now. Instead, Apple essentially is reliant on third parties to build the frontier models that it can then incorporate into its devices.
This is a major shift for Apple, because it will no longer control the base-level technology powering its products. For decades, Apple has been the platform that all other apps were built on; now Apple runs the risk that its iOS will just be one more "app" built on the OpenAI GPT or Google Gemini or Meta Llama AI operating system.
If Steve Jobs were here today, Apple would already be working on the next revolutionary product that would blow our minds.
Second, Apple probably needs some fresh blood to get disruptive innovation going again. Cook has certainly done well by Apple shareholders since he took the reins (the stock is up roughly 17 times under Cook's leadership). But again, that is primarily because Cook simply did a good job managing the platform that Jobs had already built. If Apple is to remain as dominant for the next decade as it has been for the last decade, it needs to invent new form factors and new services that people will go crazy for.
Jobs famously said that "People don't know what they want until you show it to them." Apple's next "form "wow" factors might include stylish, light, and "cool" VR/AR glasses and headsets (like Meta), robots (like Tesla's $(TSLA)$ Optimus), implanted computer interfaces (like Neuralink), holographic displays, or other amazing devices. If Jobs were here today, Apple would already be working on the next revolutionary product that would blow our minds.
Third, Apple needs to realign with Jobs' insane focus on perfectionism and quality. Jobs was probably a perfectionist to a fault, but it made Apple crank out downright amazing and beautiful products that everyone wanted to get their hands on. Apple has lost a little of that perfectionist spirit, as shown most recently by its clunky and awkward Vision Pro headset. We think there is zero chance that the Vision Pro would have been rolled out as it is if Jobs were still at the helm. While the Vision Pro has some amazing functionality, it is heavy (about 1.5 pounds), awkwardly sized, and the dongle battery is attached to the headset via a cable! When you throw on the $3,500 price tag, it's no surprise that Apple reportedly cut Vision Pro production earlier this year.
Apple as a company and as an investment will probably be fine for the next few years (I have owned this stock since it traded at a split-adjusted price of 20 cents in 2004). But it is my second least-favorite Magnificent Seven stock right now (Microsoft is our least favorite). If Apple was trading at a lower valuation, the company's AI potential might be more exciting, but at 33 times forward P/E, Apple is just a hold for now. Maybe at some point in the next decade, the leaders at Apple will bring back the spirit of Jobs through some AI app and put the company back on the track to glory.
