The "hardware veteran" takes over as CEO, will Apple Inc.'s (AAPL.US) AI answer sheet be written by chip gene?

After 15 years at the helm of Apple Inc., Tim Cook announced that he will officially step down as CEO on September 1st this year. He leaves behind a business empire with a market value approaching $4 trillion, massive cash reserves, and an unbreakable hardware ecosystem. However, with senior hardware executive John Ternus confirmed as his successor, investors and Wall Street analysts have shifted their focus beyond the financial data of the Cook era to a more challenging core question: in the current wave of generative artificial intelligence sweeping the globe, how will this tech giant, which heavily relies on hardware profits, use its proud hardware genes to answer a arithmetic question about the future of AI. With Cook stepping down, Apple Inc. faces many challenges. These include a supply chain that has become increasingly complex due to political tensions with GEO Group Inc, and continuously soaring prices of storage chips driven by unprecedented demand for artificial intelligence infrastructure. But for Ternus, perhaps the most crucial task during his tenure is to push the company to delve deeper into the field of artificial intelligence - an area where Apple Inc. is currently lagging behind many other large market value peer companies. Apple Inc.'s current AI strategy: Avoiding substantial capital expenditures A deep analysis of Apple Inc.'s capital expenditure structure reveals that the management philosophy of the Cook era tends more towards returning value to shareholders through extreme supply chain management and high-profit service ecosystem (AppleCare, iCloud, App Store commissions) rather than investing heavily in capital expenditures. This is in stark contrast to their Silicon Valley peers. So far, Apple Inc.'s strategic approach in the field of artificial intelligence has mainly been about avoiding large capital expenditures; in comparison, giants like Microsoft Corporation, Alphabet Inc. Class C, Amazon.com, Inc., and Meta cumulatively invest billions of dollars each year in building new data centers and equipping them with expensive AI chips. In the crucial development phase of basic AI models, Apple Inc. has also chosen to defer proprietary research and instead rely on Alphabet Inc. Class C's Gemini model to provide cloud support for its AI capabilities - including the highly anticipated major upgrade to Siri, which is expected to be officially launched later this year after experiencing delays. This "inaction" has been seen in the past as a business wisdom to maintain profit margins, but in the current phase of the AI competition entering the stage of computing power supremacy, whether the "capital discipline" left by Cook to the successor will evolve into a "value trap" that hinders innovation has become the market's biggest concern. In 2024, Apple Inc. introduced the "Apple Intelligence" artificial intelligence system. This system integrated a series of functions including image generation, text rewriting, summary of push notifications, and deep integration with OpenAI's ChatGPT. Although consumer reactions to this system were mixed, Apple Inc.'s iPhone sales continued to be strong; users on these devices could still enjoy a diverse range of AI applications - most of which, however, originated from services provided by other tech companies. Can the hardware faction fight back in the AI battle? At 50 years old, Ternus is not an expert in AI algorithms or software services; he is a pure hardware engineer and product manager. In the official press release from Apple Inc., emphasis was placed on his leadership in innovative product lines over 25 years - from the iteration of the iPad, the birth of AirPods, to the full migration of Apple Silicon chips in the Mac product line. Apple Inc.'s recent strategies are all betting on the fact that in the next few years, heavy computing tasks will be carried out directly on chips inside phones. This trend will fully leverage Apple Inc.'s strengths, as the company has been integrating chips with AI processing capabilities into various devices since 2017. "By appointing hardware industry leader Ternus, Apple Inc. may be sending a signal: it still believes that the future of artificial intelligence will rely on devices with tight integration of software and hardware, rather than just focusing on the software aspect," said Timothy Hubbard, assistant professor of management at the University of Notre Dame. Currently, Apple Inc. is gaining strong growth momentum from iPhone sales. In the just-ended quarter, iPhone revenue increased by 23% year-on-year, reaching $85.3 billion; the company attributed this significant growth to strong sales of the iPhone 17 series models released last September. At the time, Cook stated that the market demand for the iPhone was "simply amazing." The company is set to release its second quarter earnings report next week. While Cook will still be the CEO at the time of the report's release, investors will have many questions for Ternus about the future direction of Apple Inc. Hardware integrated with AI technology seems to represent the future direction of the market - this may be achieved through a combination of wearable devices, Siasun Robot&Automation technology, spatial computing, or through some form of new product that Apple Inc. has not yet revealed to the public. In January this year, media reports indicated that Apple Inc. is accelerating the development of three upcoming AI wearable devices, all of which will be built around core Siri technology, including smart glasses, a pendant-style device, and AirPods with built-in cameras. In addition, Apple Inc. is expected to launch a foldable screen phone; Ben Bajarin, CEO of Creative Strategies, referred to this as the "most significant hardware moment in recent years." Although the sales data for the iPhone 17 series is impressive, investors need to beware of the structural concerns behind the data. Research firm data shows that the strong growth of this round of iPhone sales is more due to the release of pent-up upgrade demand, rather than the direct driving force from Apple Intelligence features. In fact, the most popular free AI applications in the iOS App Store are not Apple Inc.'s own software, but ChatGPT and Claude. In the eyes of consumers, Apple Inc. devices are increasingly playing the role of a "high-end AI content browser." Furthermore, the supply chain restructuring caused by political tensions with GEO Group Inc and the soaring prices of storage chips are eroding Apple Inc.'s hardware gross margin space. Although Apple Inc. does not directly purchase H100 chips used for data centers, the squeeze on storage capacity by AI servers has pushed up the procurement costs of memory and flash components in various Apple Inc. devices. In an interview in March, Bajarin said, "I think the biggest question right now is: what will be the next groundbreaking product after the iPhone? The smartphone category to which the iPhone belongs has matured, and we cannot yet determine what the successor will be; but one thing is certain, it will be presented in some form of AI hardware." AI and the service business At 50 years old, Ternus will also face the challenge of how to vigorously promote the application of AI technology in Apple Inc.'s service business sector. In this business segment, Apple Inc.'s revenue mainly depends on iPhone users subscribing to AppleCare, iCloud, Apple TV+, and using Apple Pay for payments. When consumers upgrade to paid versions of ChatGPT, Claude, and other generative AI services or chat for Siasun Robot&Automation, Apple Inc. can also earn a certain percentage of revenue sharing. However, Forrester analyst Dipanjan Chatterjee pointed out that in the coming years, "Apple Inc. will face turbulent times, because the way consumers interact with technology is undergoing drastic changes" - especially in the current rapid development of generative AI technology. Ternus will also have to make a choice: whether to continue to uphold the company's long-standing principle of "privacy first" or to embrace a "personalized customization" strategy driven by AI technology. For Cook, Apple Inc.'s "privacy-first" policy on handling user data has long been a core differentiating advantage for the company compared to Meta, Alphabet Inc. Class C, and other tech giants - in contrast, the business models of the latter two giants often focus on assisting brands in precise targeting and reaching user groups through advertising. Gene Munster, from Deepwater Asset Management, said in an interview on Monday that given the prospects of Apple Inc. in the field of "personalized AI," his company has recently increased its holdings of Apple Inc.'s stock. Munster said, "For Apple Inc., now is the moment to tell investors a compelling story - that they have the ability to seize this opportunity." In the press release announcing the CEO position change on Monday, Apple Inc. did not mention AI at all. Instead, the focus in the press release regarding Ternus was primarily on his 25 years at the company and his key role in "launching multiple new product lines (including iPad and AirPods), and iterating on updates to iPhone, Mac, and Apple Watch product series." However, it is obvious that when the "Ternus era" officially begins in over four months, AI will inevitably be the central focus. In addition, Professor Hubbard from the University of Notre Dame pointed out that at least on the innovation level, Apple Inc. must return to its roots. Hubbard said, "It is this spirit of 'rapid innovation' that has made up the foundation of Apple Inc.'s dominance - and now, this may be exactly where the company needs to return."