Best AI Stocks to Buy Now Before it Soars

Artificial Intelligence (AI) is revolutionizing industries across the globe, driving innovation and transforming how businesses operate. Since OpenAI launched ChatGPT on November 30, 2022, the S&P 500 has delivered a total return of 33%. This surge has been fueled by major announcements from tech giants like Microsoft, Nvidia (NVDA), Alphabet(GOOGL), and nearly every other leading tech company worldwide. Clearly, AI development has progressed significantly in a short span of time.

One company, however, has been relatively quiet about its AI initiatives. But its management has promised to "break new ground" in generative AI this year, with groundbreaking announcements expected in just a few weeks.

Apple (AAPL 0.01%) is set to reveal its AI developments and partnerships at its annual Worldwide Developers Conference (WWDC), starting on June 10. Here's what investors can expect and what it could mean for Apple's stock.

Difference between Apple's New Moves with Other Techs

A cornerstone of Apple's brand is its commitment to data privacy and security, which is why it emphasizes that most of its AI features will operate directly on personal devices.

According to Bloomberg's Mark Gurman, Apple has developed its own large language model (LLM) capable of summarizing missed notifications, providing synopses of news articles, and transcribing voice memos. The company will also enhance existing features such as auto-populating calendars, suggesting apps, and editing photos.

While these individual features may not be groundbreaking, the potential for more advanced on-device AI capabilities as Apple refines its LLM could be the bigger story. As AI becomes more integral to our digital lives, the ability to maintain data privacy and security through on-device processing could mark the next significant advancement in AI, with Apple at the forefront.

However, Apple recognizes the substantial demand for AI features that current on-device capabilities might not fully support. To address this, Apple has partnered with OpenAI to integrate its technology into the next version of iOS. Additionally, Apple has been in discussions with Google to utilize its Gemini model, though no agreement has been reached yet.

These strategic moves indicate that while Apple is committed to enhancing on-device AI capabilities, it is also open to leveraging external technologies to meet user demand and stay competitive in the rapidly evolving AI landscape.

How Apple Stands Out in AI Industry?

One of the biggest challenges in developing AI technology is the immense need for compute power. Nvidia has a stronghold on the high-end GPU market, but it can't produce chips fast enough to meet the surging demand. This scenario, while great for Nvidia's profits, makes it extremely costly for tech giants to build data centers filled with Nvidia GPU clusters.

Almost every major tech company currently using Nvidia chips for their AI data centers, including Microsoft and Alphabet, is developing its own chips for training large language models. However, creating cutting-edge chips is difficult, and manufacturing them takes a long time.

Apple, on the other hand, uses its own chips in its AI data centers, which saves money and reduces the potential for bottlenecks that other big tech companies may face as they procure Nvidia chips and manufacture their own. Currently, Apple uses M2 Ultra chips found in the Mac Pro for its data centers. Next year, it may switch to the M4 chips found in the latest iPad Pro. Apple's established manufacturing relationships enable it to quickly and cost-effectively build out data centers as it ramps up its AI efforts.

The fact that Apple uses the same chips to train its large language models (LLMs) as it does in its devices is also promising for the future of on-device AI capabilities in Apple products.

Implications for Investors

Integrating advanced AI capabilities into the iPhone could spur developers to create new AI-powered apps. Apple could capitalize on this by developing what analyst Dan Ives calls an "AI App Store." AI-enabled features, such as the circle-to-search found on Google's Pixel phones, could drive more traffic to search engines. Apple could see a significant boost to its services revenue if this happens. Court documents revealed that Apple receives a 36% cut of all Google search revenue generated on iPhones, Macs, and iPads.

AI could drive sales in the two largest segments of Apple’s business in fiscal 2025. The announcements expected next month could be just the beginning.

While Apple shares are nearing their all-time high again, the stock still appears attractive. Although its forward price-to-earnings ratio is approaching 30, which might deter some investors, a premium price is justified due to its massive share repurchase program, existing net cash position, and the long-term outlook for another period of strong earnings growth next year and beyond.