Semiconductor Stocks Surge Amid AI Evolution, Apple Poised for Gains

Semiconductor stocks have benefited significantly from the rise in generative AI, as technology companies seek to secure ample computing resources for training and deploying their AI models. For instance, Nvidia (NASDAQ: NVDA), a major player in GPUs, has seen its stock increase by about 170% since early 2024. Meanwhile, Broadcom (NASDAQ: AVGO), known for custom AI chips, is up 110%. However, concerns arise regarding potential cooling demand, particularly with the introduction of more efficient AI models like China’s DeepSeek and as the urgent “fear-of-missing-out” phase of AI hardware demand starts to subside. Despite this, Apple (NASDAQ: AAPL) could emerge as a big winner in the next stage of AI development. The company began its AI initiatives late last year by introducing Apple Intelligence tools for its iPhones, iPads, and Macs. With a large installed device base and strong semiconductor design skills, Apple is well-positioned to offer personalized AI solutions while minimizing costly server-side computing needs.

Enhancing User Experience: Apple’s Strategic AI Rollout

Although Apple arrived a bit late to the generative AI scene, its recent Apple Intelligence offering is noteworthy. The update enhances Siri and introduces new tools for writing assistance, calculation, and image generation. Unlike many tech giants struggling to find viable generative AI applications, Apple’s implementation stands out. Currently, the AI features are exclusive to the iPhone 16 and 16 Pro models, with a notable exception for last year’s iPhone 15 Pro. This limitation may motivate older iPhone users to upgrade. Despite the late launch, iPhone sales remain relatively flat, with a 1% year-over-year revenue decline to $69.2 billion during the holiday season. Factors may influence a future increase in sales; Apple utilizes a phased rollout of features with each software update, and many customers might be postponing upgrades until all AI capabilities are fully launched. Presently, we estimate that less than 20% of Apple’s total iPhone user base can access Apple Intelligence, suggesting substantial room for growth as more devices support AI functionality.

Apple’s Services Growth: A New Revenue Frontier

In the past 12 months, Apple’s services division generated close to $100 billion in revenue. It experienced a 14% growth in sales for the first quarter of FY 2025, reaching about $26 billion, making it Apple’s fastest-growing segment. Strong app sales and an increasing number of paid subscriptions, now surpassing 1 billion, are driving this growth. Furthermore, new AI-driven tools may offer further growth opportunities for Apple’s services. Enhanced app features could lead to more premium subscriptions, and the need for increased storage due to on-device processing and personalized models could create additional revenue streams. With over 2.3 billion active devices, Apple could introduce appealing AI services at modest monthly costs to its customers. Unlike competitors who have invested heavily in AI-related capital expenditures, Apple is likely to focus on on-device processing, meaning users will indirectly pay for the greater computing power their devices need.

DeepSeek’s Efficiency and Its Impact on Apple

China’s DeepSeek AI model has introduced a game-changing approach to AI, benefiting companies like Apple while posing challenges for semiconductor giants like Nvidia. DeepSeek emphasizes software optimization instead of hardware reliance, drastically lowering the costs to train AI models. The company reportedly spent just $5.5 million to train its V3 model, a stark contrast to the hundreds of millions estimated for OpenAI’s projects. As companies explore DeepSeek’s open-source strategies to refine AI models, demand for high-end GPUs from companies like Nvidia may decline. However, this trend could be advantageous for Apple. DeepSeek’s smaller AI models run efficiently on basic hardware, including PCs and smartphones, demonstrating competitive performance against larger counterparts. If the shift toward lightweight AI models occurs, Apple stands to gain, given its prominence in personal computing, especially with its M Series processors known for their superior efficiency and performance.

AAPL Stock Performance: Volatile Returns and Future Prospects

The performance of AAPL stock has seen significant volatility over the past four years, with annual returns fluctuating compared to the S&P 500. Returns for AAPL included 35% in 2021, -26% in 2022, 49% in 2023, and 31% in 2024. In comparison, the Trefis High Quality (HQ) Portfolio, which includes 30 well-performing stocks, has consistently outperformed the S&P 500 during the same period. This begs the question: Will AAPL face a similar downturn as in 2022, potentially lagging behind the S&P in the coming year? Or is a strong upswing imminent?

Currently, we maintain a neutral stance on AAPL stock with a price estimate of $228, aligning closely with the current market price. While we recognize Apple as a key beneficiary of the AI boom, the stock’s forward earnings valuation at 31 times is steep, especially as revenue projections suggest mid-single-digit growth over the next two years. Conversely, our outlook on NVDA stock is cautious, with an estimated price of $93, approximately 30% under its current market value.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.