Laura Martin, Needham senior internet and media analyst, joins 'The Exchange' to discuss Apple's gen AI plans and what to expect ahead of its earnings report next week.

Cupertino

Needham analyst Laura Martin has expressed concerns over Apple's position in the generative AI sector, warning investors to be cautious. Martin points out that while competitors like Google and Amazon are dramatically increasing their capital expenditures on AI, Apple’s spending has remained relatively flat. She argues that Apple cannot afford to remain on the sidelines as generative AI becomes increasingly integrated into competing platforms, particularly Android, which is owned by Google.

Martin suggests that Apple faces existential risks if it does not catch up, as its ecosystem and services are heavily reliant on the iPhone. If Android continues to outpace Apple in AI integration, Martin warns that Apple could see a decline in its installed base and overall value. She emphasizes that Apple must articulate a comprehensive AI strategy and invest significantly to maintain its competitive edge.

Apple can't play on sidelines in AI race, says Needham's Laura Martin

Apple's AI lag has Needham's Laura Martin warning investors to be cautious heading into the print. Remember, she downgraded shares to hold back in June. It was captivating everyone's attention. Laura joins us now. And I mean, it was a good call, Laura, but now going into earnings, I guess a similar question for you is, has that bar now reset low enough that Apple can kind of, you know, remind people it still puts out a ton of cash. It still makes a lot of money. People still buy iPhones. And, you know, is that good enough? So our note out today is really trying to be additive on this. It's our feeling that they cannot stay on the defensive or on the sidelines with generative AI and that the next shoe to drop here is they actually have to articulate a comprehensive generative AI strategy, which will involve hundreds of billions of dollars in our opinion, because all of their big cap, their big tech competitors, we just saw Google raise its capex this year to $85 billion this year. Amazon's already at $105 billion of capex this year, and I expect them to raise it again. So that's the kind of, and Apple's spending $12 billion total, and as they have been for the last three years. So they're so far behind now that if they want to keep great full-time equivalents, not just the ones that are leading to meta, but if they want to create great software engineers, they need to have generative AI for those cutting edge employees to play with, because there's a lot of new things that are possible with generative AI, and if they don't adopt some of those, they're just going to have brain drain sort of structurally. So to have the best, and by the way, their key competitor here is Android, which is owned by Google, and Google on their call yesterday or the day before, all they talked about is how they're integrating Gemini and generative AI into every product they have, for most of all, Android. So I do not think Apple can stay by the sidelines, and catching up is going to be really expensive. I just love to play devil's advocate on this one, to go back to this issue over and over again. Okay, let's say I'm a shareholder. $12 billion sounds like a bargain, right? It's nothing, basically, compared with $85 billion by this other company. But again, I use these apps on my phone all the time, the AI apps, right? So is there a strategy of simply waiting it out, not burning a ton of cash now, and once it becomes clear, whatever the killer feature is for the Android phone or all the rest of it, I have to imagine they can copy and copy quickly and copy pretty cheaply. So I'm happy to take the other side of that argument and say there's real existential risk here, because there are two players, iOS and Android, and if Android is going to integrate all of the latest Android, like Gemini and generative AI tools and features, the next time you replace your iPhone a year from now, two years from now, three years from now, that Android ecosystem is going to have more and more cool stuff in it, and then Apple starts losing its installed base. And I would argue that Apple's a single product company, that iOS, owning that iPhone is what makes you buy the watch or the tablet or the Mac, that those are upsells to the iPhone, and services is 100% reliant on the iPhone being owned. So anything that threatens iPhone replacements or growth threatens actually the entire value of this company. So it's unfortunate for Apple, bad luck, that the guy that's integrating generative AI first over at Google owns Android. So Android is going to rush ahead here.

EU Commission President Ursula von der Leyen has said she will meet US President Donald Trump on Sunday in Scotland to "discuss transatlantic trade relations."

Glasgow

Global Tariffs

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Washington

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New York

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Pangasinan

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Jerusalem

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Bangkok

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Ukraine Invasion

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Beijing

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London

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Breakdown