Apple (NASDAQ:AAPL) must engage more aggressively in the generative AI race or risk long-term strategic setbacks, according to a new note from analysts at Needham. Ahead of Apple’s upcoming third-quarter earnings call, the firm urged caution for investors, citing growing pressure on the company to lay out a clear AI roadmap.
“We do not believe that Apple can remain on the sidelines, without a clearly articulated GenAI strategy and action plan,” wrote analyst Laura Martin.
She highlighted the fast pace of AI adoption by Apple’s competitors, warning that Apple’s delay in unveiling a generative AI initiative could have serious consequences. “By implication, iOS is falling farther behind Android every quarter,” she said, stressing that this widening divide could represent an “existential risk” to Apple, given how crucial the iPhone is to its hardware and services ecosystem.
Martin also suggested that Apple may soon need to commit significant financial resources to bridge the gap. She speculated the company might announce “a multi-billion dollar/year license deal to have Anthropic or another proprietary LLM build AAPL its own unique and private GenAI infrastructure,” or alternatively raise its capital expenditure plans to fund AI-related infrastructure.
Needham raised concerns beyond financial costs as well, including the challenge of retaining top talent. Martin noted that without the ability to meaningfully incorporate GenAI into its products, Apple “will lose its best AI employees to META (NASDAQ:META), OpenAI, Anthropic, etc.”
Investor frustrations are also mounting, with both media and market voices increasingly calling for leadership change. Tim Cook’s position as CEO has come under greater scrutiny with each quarter Apple fails to roll out a comprehensive AI strategy.
With Apple stock down 14% year-to-date—contrasting with an 8% rise in the S&P 500—Martin noted that investor sentiment is clearly shifting. The absence of a revenue stream tied to generative AI, especially when compared with rivals like Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) who benefit from LLM services through their cloud platforms, adds to Apple’s strategic challenges.
Martin warned that this gap could “result in a valuation discount” for Apple when compared to peers. Although Apple continues to trade at a premium multiple of 27.7x forward earnings, the company is underperforming in both revenue and margin expansion.
“We believe that AAPL’s share price will fall once investors understand the investment levels required to catch up with the other Big Tech conglomerates that were early adopters of GenAI,” she concluded.
Needham has maintained its Hold rating on Apple stock.
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