Is Apple Stock The Safest AI Play In The DeepSeek Era?

Semiconductor stocks have been among the biggest beneficiaries of the generative AI surge, as tech companies have focused on securing as much computing ammunition to train and deploy their AI models. For perspective, GPU major Nvidia stock (NASDAQ: NVDA) has gained about 170% since early 2024, while Broadcom stock (NASDAQ: AVGO), which sells custom AI chips, is up 110%. That being said, there are concerns that demand could cool off, with the advent of more efficient AI models such as China’s DeepSeek and also as the frantic “fear-of-missing-out” phase of AI silicon demand eventually eases. See How DeepSeek’s AI Model Impacts Nvidia Stock. We believe Apple stock (NASDAQ: AAPL) could be a big winner in the next phase of AI evolution. Apple began its AI push with the rollout of Apple Intelligence tools for its iPhones, iPads, and Macs late last year. The company is in a strong position to benefit, given its large installed base of devices, strong semiconductor design capabilities, and ability to deliver more personalized and secure AI while spending less on costly server-side compute requirements.

AI Drives Upgrade Cycles

Although Apple was a bit late to the party, with its new Apple Intelligence offering – which includes upgrades to its Siri voice assistant, new writing assistance tools, calculator features, and image generation – the company’s implementation of AI is pretty impressive. This is in contrast with many other big tech players who have been yet to find a solid use case or business model to deploy their generative AI offerings. Although primarily a software update, on the iPhone side, Apple Intelligence is exclusive to iPhone 16 and 16 Pro models, with the only exception being last year’s iPhone 15 Pro devices. This limited backward compatibility creates an incentive for users of older iPhones to upgrade.  Now while the software debuted late last year, iPhone sales have remained somewhat tepid. In the holiday quarter, iPhone revenue actually declined 1% year-over-year to $69.2 billion. We believe that some factors could drive an eventual uptick in sales. Apple has adopted a staggered approach, rolling out a small set of features with each software update.  Many customers may be holding off on upgrading until all AI features are fully available. There may be a lot of scope for upgrades as we estimate that Apple Intelligence is likely to be compatible with well below 20% of Apple’s total iPhone installed base at the moment. As AI capabilities expand across more devices, this should help to boost Apple’s sluggish iPhone and iPad businesses, which have seen little growth in recent years.

Services Growth

Apple’s services business clocked close to $100 billion in revenues over the last 12 months. Services sales grew by about 14% over Q1 FY 2025 to about $26 billion, an all-time high, making it Apple’s fastest-growing segment.  Growth is being driven by strong app sales and a growing number of paid subscriptions, which are now over 1 billion.  New AI-powered tools could also open up new avenues for growth for Apple’s services business in a couple of ways. For instance, Apple could offer more premium features and subscriptions as it enhances its apps with AI. Moreover, the higher storage requirements for on-device processing and personalized models could also open up new avenues for monetization for Apple. Apple has over 2.3 billion active customer devices and if it is able to sell compelling AI tools costing a few dollars a month, it could  add new revenue streams. See our breakdown of Apple’s services business revenues. Moreover, unlike other big tech players who have set aside tens of billions of dollars on AI related capex outlays, Apple is likely to leverage more on-device processing, meaning that its customers will end up footing the bill for higher compute power on their devices. See How DeepSeek’s AI Model Impacts AVGO Stock?

The DeepSeek Breakthrough Benefits Apple

A recent breakthrough from China’s DeepSeek AI model has led to a shake-up for AI semiconductor stocks like Nvidia. DeepSeek prioritizes software-driven resource optimization over hardware dependency, cutting AI model training costs significantly. It reportedly spent just $5.5 million to train its V3 model, far less than the hundreds of millions OpenAI is estimated to have spent. This computing efficiency could reduce demand for high-end GPUs as AI companies adopt DeepSeek’s open-source methods to optimize models. While this is a headwind for semiconductor players like Nvidia, which rely on selling powerful GPUs for servers, it could benefit Apple. DeepSeek has developed smaller, distilled AI models that run efficiently on basic hardware like PCs and smartphones, outperforming some larger models on key benchmarks. More efficient AI models that run locally could potentially drive broader adoption as developers build smaller, specialized models for specific devices and use cases. If AI shifts toward lightweight models running locally, Apple stands to gain given its dominance in personal computing. Apple’s M Series processors, known for their high performance and power efficiency, could be particularly well suited for handling these workloads.

The increase in AAPL stock over the last 4-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 35% in 2021, -26% in 2022, 49% in 2023, and 31% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could AAPL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We remain neutral on AAPL stock, with a $228 price estimate which is roughly in line with the current market price. While we see Apple as a major beneficiary of AI, the stock trades at a relatively expensive 31x forward earnings, given that revenue is projected to growth at just about mid-single-digit levels for the next two years. On the other hand, we remain negative on NVDA stock, with a $93 price estimate, which is about 30% below the current market price.

[1] Returns as of 2/11/2025
[2] Cumulative total returns since the end of 2016

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