It's Official: Apple Needs AI to Be a Winner

Investors who keep close tabs on Apple (AAPL -0.12%) already know its recently ended fiscal fourth-quarter results were just mediocre. Although sales and operating income were both up year over year, and the company beat Wall Street's estimates on revenue and earnings per share, its actual net progress was modest. Top-line guidance for the quarter currently underway was also less than thrilling, and the report sent shares lower rather than higher.

However, there's a takeaway buried in the numbers and post-earnings discussion that's too important to ignore: This company desperately needs its consumer-oriented AI platform -- called Apple Intelligence -- to be a hit. If it isn't, its days of anemic growth could be here to stay.

Tepid iPhone demand is undermining companywide revenue

Apple's revenue of $94.9 billion for the quarter ending in September improved on sales of $89.5 billion in the prior-year period, topping analysts' consensus estimates of $94.6 billion in the process. While profits slipped from $1.46 per share in the comparable quarter a year earlier to only $0.97 per share this time around, that dip reflected a one-time tax payment. The adjusted figure of $1.64 per share was still better than the $1.60 per share analysts were expecting.

Curiously though, iPhone revenue only grew 5.5% last quarter despite the then-pending October launch of Apple Intelligence, which requires the newer iPhone 15 or iPhone 16 to function.

Both smartphones were available during the quarter in question. The latter was released in late September, and the former was launched in September 2023. There just wasn't a swell of demand.

It was not exactly a roaring start to Apple's artificial intelligence efforts.

And yes, it matters, and perhaps even more than you might expect.

See, the iPhone consistently accounts for roughly half of Apple's revenue, and presumably, a decent-sized chunk of its gross profits and operating income. If Apple's doing well, it's largely thanks to the iPhone. If its iPhone business is stagnating, then Apple as a whole is mostly likely stagnating too. And there's the rub: As measured by revenue or by unit sales, Apple's iPhone business hasn't really grown since early 2022. Neither has the company's total top line, as sales growth for Macs and iPads fades. Its services arm is the only one showing any real net long-term growth, but that's not enough on its own to drive companywide growth.

Don't look for any meaningful help immediately ahead, either. CEO Tim Cook commented during the fiscal fourth-quarter earnings call that Apple is only looking for top-line growth in the "low- to mid-single-digit" range for the quarter now underway. The holiday quarter is usually a big one for the popular smartphone, but that's not likely to be the case this time around.

Demand growth for the iPhone remains lackluster compared to the pre-2022 period, and Apple Intelligence may be the only catalyst that could reignite it. So far, however, it's not helping much.

Generative AI won't be a panacea for Apple's woes

Never say never. Technology market research outfit IDC suggests that sales of generative-AI-capable smartphones like the iPhone 15 and iPhone 16 will reach 234.2 million units this year, en route 912 million in 2028, when these devices will account for 70% of the smartphone market. That tailwind will certainly prove helpful to Apple.

But it will also help other AI-ready smartphone manufacturers.

Take Samsung's Galaxy S24 and Google's Pixel 8 as examples. The former utilizes Qualcomm's Snapdragon 8 processor, which was built to handle heavy-duty artificial intelligence work. The Pixel 8 utilizes Google's own Tensor G3 chip, which was also specifically designed to run onboard AI.

Then there's consumers' option of continuing to punt the heavy lifting of generative AI work to the cloud. Microsoft's CoPilot, for instance, is a portable artificial intelligence platform that functions on most smartphones, but can pick up where that user left off if and when they shift their work to a personal computer.

There's also the possibility that -- while still game-changing -- generative artificial intelligence turns out to be not quite as game-changing as previously predicted.

That's a prospect being suggested by technology market research firm and consultancy Gartner. In this year's Hype Cycle for Emerging Technologies report, which it published in July, the firm said generative AI is now past its "peak of inflated expectations" phase and entering its "trough of disillusionment" stage. That's simply the point the world is forced to accept that the tech doesn't actually offer as much practical or reliable usefulness as its boosters initially intimated.

Gartner's not alone in its concern. As Goldman Sachs' Head of Global Equity Research Jim Covello commented regarding generative AI in July, "While the question of whether AI technology will ever deliver on the promise many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn't designed to do."

That's not to say Apple Intelligence (or any other consumer-facing sort of generative AI) is useless. It does call into question, however, just how much iPhone demand such services will be able to drive.

Anything but a rock-solid bullish thesis

To be clear, Apple is far from doomed. Even without any meaningful growth in the cards, it is still one of the world's biggest and most profitable companies. It still leads the smartphone market, and its services business continues to grow. In fact, the company suggests its services arm's growth will match its current annualized growth pace of just under 13% for the quarter now underway. It may even keep up that pace of growth for years.

Unless the iPhone business starts picking up steam though, Apple's also likely to continue reporting merely mediocre results. Artificial intelligence looks like the only potential driver of growth, but it's far from a sure thing.

There's no need to dump your Apple shares -- at least not yet. Just know that there are companies with more certain growth prospects out there right now.