Despite its focus on the consumer, rather than businesses, Elliot Johnson argues that Apple can still find ways to win
At the end of July, Apple announced a plan to give US consumers the ability to lease their iPhones. Partnering with ‘buy now pay later’ platform Klarna, the tech giant will allow consumers to sign up for monthly payments of $17.99(USD) for two years. At the end of that term, consumers have to give up the phone, or they can upgrade to a new model. The move comes in the context of rising device prices, driven in large part by huge demand for memory chips in the AI buildout. For Elliot Johnson, Chief Investment Officer at Evolve ETFs in Toronto, the story is less about how Apple is managing inflation and the affordability crunch, and more indicative of how that company can drive growth with consumer-facing tech.
Enterprise narrative has driven much of the recent growth narrative for tech stocks, Johnson accepts. The idea that companies will pay for AI to reduce headcount, improve margin, and/or increase productivity is straightforward. The consumer business case is somewhat more complex, though Johnson believes that Apple is charting that course and finding ways to grow.
“Apple is a very interesting company because they have been criticized for a few years for being behind on AI… They’ve not been in that [AI] arms race. They’re not a hyperscaler, they’re not an AI frontier model company. They have a very, very successful chip business with Apple Silicon that they only use in their products. And some of those, interestingly, are very well suited to AI — which is, there are now shortages of Macs, especially Macs with large amounts of RAM. People running local models have been using some of those. So they’ve got people using AI on their hardware,” Johnson explains. “Apple is actually in an interesting position where they never changed their business. They continue to just be very, very focused on personal computing hardware. And now they’ve got an AI story because they’ve partnered with Google on it. And people are now saying, ‘hang on a second, what’s going to be the relevant consumer products and services people buy in the age of AI?’ And I think people are saying, well, ‘I’m still going to be owning an iPhone, I’m still going to be owning a Mac.’
How a focus on consumer tech gives Apple an AI advantage
The story of Apple Silicon isn’t too dissimilar to Nvidia’s rapid rise in the first days of the AI theme. Where Nvidia’s GPUs were the best processing units because they served a market for gaming graphics, Apple has built a high-quality integrated software and hardware system because it iterates on the iPhone every two years. That process has resulted in an advantage for Apple in an area of AI that could show real consumer growth: on-device models.
Johnson explains that rather than running models on the cloud and processing prompts in data centres, many of the daily tasks that consumers and ordinary people use AI for can be done by chips on a single device. This may get easier as inference, the process that makes AI less compute-intensive, improves. By building on-device AI, Johnson says that Apple can help make their smart devices even smarter. The gadgets themselves will be roughly the same shape and size, but their capabilities will be greater.
The highly disruptive and widely-heralded nature of AI makes some investors and consumers think that every aspect of technology is changing with it. While Johnson continues to emphasize the ‘transformative’ nature of this technology, he also stresses that some of the traditional dynamics in tech will remain in place. That includes a consumer need for devices, and specialized success for companies that serve consumers and enterprise. The longstanding dynamic between Apple and Microsoft as leaders in consumer and enterprise tech respectively should, in his view, continue into the age of AI.
What device-leasing does for Apple
There is an inflationary dynamic behind the new leasing model that Apple and Klarna are rolling out, but Johnson emphasizes Apple’s broader strategic shift towards more recurring revenue as a more prized form of income. Johnson notes that much of Apple’s success has come from building devices aimed at more affluent consumers, the upper arm of the K-shaped economy. Those are the kind of consumers who can afford to change devices every few years.
Nevertheless, even those consumers might be put off by the sticker shock of a $1,500 phone. Monthly payments may be easier to sign up for, and the idea of leasing and upgrading also serves Apple’s wider ecosystem of services like iCloud. As on-device AI tools improve, the leasing program may result in consumers treating their iPhones like a leased car. The end result is that it turns hardware into a service, which gives greater recurring revenues, more visibility into forward earnings, and makes Apple all the more investor friendly.
As advisors look to explain the AI consumer story to their clients, and highlight moves that Apple is making, Johnson emphasizes the value in using tangible human-level interactions with technology to outline the wider macro forces at work.
“Lean into people’s user experience,” Johnson says. “it’s the best way to explain why the enterprise wants it too. If you’re an advisor talking to a client and the client doesn’t understand why companies are paying so much on AI, you can show them how when they asked AI asked for a recipe and then it gave you a really good answer. You can explain that your team can ask it for a spreadsheet and it makes the spreadsheet and it takes 10 seconds when it used to take a day. They can see how it allows people and companies to perform better, and when it’s framed what way investors tend to get it.”
