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How Apple, Microsoft and 3 other tech giants can make money with AI geared to consumers

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2 weeks ago

June 16, 2024

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Apple revealed its highly anticipated artificial intelligence strategy this past week — causing investors to rejoice and push shares to all-time highs. It’s a far cry from the stock’s rough start to 2024. Marketed as “AI for the rest of us” — Apple is squarely positioning its upcoming generative AI features for the 2.2 billion active users of its iPhones and other devices. With Apple now in the AI game, how are the tech giant and four of our other mega-caps targeting consumers to monetize artificial intelligence? AAPL YTD mountain Apple (AAPL) year-to-date performance Starting with Apple, the iPhone maker debuted its personalized AI suite, called Apple Intelligence, at its annual Worldwide Developer Conference (WWDC) last Monday. Apple plans to monetize AI, not by charging a specific fee, but rather by adding new features to usher in an upgrade cycle for the iPhone — the likes of which we haven’t seen since 5G capabilities came to the iPhone 12 in October 2020. While Apple has cultivated a broad offering of devices and high-margin services under CEO Tim Cook, iPhone sales still make up roughly 50% of overall revenue. New buzzy features on Apple’s flagship device will include an AI-infused Siri, which will allow users to seamlessly utilize OpenAI’s ChatGPT as a part of the recently-announced partnership with the Microsoft -backed startup. AI improvements, however, won’t be compatible with models older than the iPhone 15 Pro, which means users will have to upgrade to more recent versions. This refresh cycle, in turn, will lift lagging device sales as Apple grapples with softness in its second-largest market, China. Outside of hardware, Wedbush thinks Apple will eventually roll out a bundled subscription service with higher-end AI capabilities. “That will be another major catalyst for the Services segment over the coming years as WWDC was music to the ears of Apple developers globally and is just the beginning of this AI Party coming to Cupertino” where Apple is headquartered, analysts wrote in a research note last week. “While Apple has been late to the game on AI with the biggest consumer installed base in the world, Cook & Co. have a unique advantage to monetize the AI Party.” Days after WWDC, Bloomberg reported that Apple won’t have to foot the bill for the extra traffic generated by the iPhone’s ChatGPT integration. Instead, the article said OpenAI will be responsible because the AI chatbot is hosted on Microsoft’s Azure cloud. Apple did not respond to CNBC’s request for comment. But, this would clearly be good news for Apple on the cost front. Shares of Apple bounced off their 2024 lows in April — soaring some 30% from the mid-$160s since then. Apple has swung from being down on the year to up more than 10%. MSFT YTD mountain Microsoft (MSFT) year-to-date performance On the consumer side, Microsoft makes money from AI by integrating new tools into its already strong legacy software. The company started selling subscriptions for Microsoft 365’s Copilot AI add-on in November 2023. Each user has to pay $30 per month to access the generative AI tool across Word, Excel, and other productivity apps. This subscription service provides enviable recurring revenue streams for Microsoft. Wall Street seems optimistic, too. Piper Sandler analysts previously forecasted that Copilot could add over $10 billion in annualized revenue to Microsoft by 2026. In May, Microsoft also announced a series of new computers with advanced AI chips that can improve battery life. The Copilot+ PCs start at $999 each and became readily available this month. The Club believes the new devices will encourage users to upgrade their PCs . In turn, this will boost hardware sales and revenue for Microsoft’s More Personal Computing division, which amounts to roughly 25% of overall revenue. (Expected AI-driven device upgrades from Apple, Microsoft, and other personal tech makers is the reason we’re invested in Best Buy . That’s where lots of these sales will take place.) Shares of Microsoft have stair-stepped their way to all-time highs, with over 17% year-to-date gains. Microsoft, Apple and fellow Club name Nvidia have all eclipsed $3 trillion market values — and have been wrestling for the top spot as the most valuable U.S. company. Jim Cramer said Friday that these three stocks are largely driving the overall market action. GOOGL YTD mountain Alphabet (GOOGL) year-to-date performance Alphabet created Gemini, formerly known as Bard, to rake in more revenue and improve the company’s position in the heated AI arms race. Think of Gemini as the Google parent’s version of ChatGPT. Gemini Advanced, a newer version of the tool, has a fee and can be bundled with other higher-end AI services across Google’s apps. For example, users can pay roughly $20 each month to use Gemini Advanced, have two terabytes of storage, and utilize AI across productivity apps such as Gmail all in one subscription. But, despite years of leading AI research, Google got beat to the market by ChatGPT in November 2022. The buzzy chatbot went viral and introduced the masses to the potential of generative AI. Missteps while trying to catch up, however, had Alphabet struggling to get its AI footing. The stock reflected that struggle at times in 2023 and earlier this year. But since their 2024 bottom in the low-$130s in March, shares have moved largely higher to records as market perceptions of the company’s AI abilities shifted. Announcements at Google’s I/O developers conference helped cement those perceptions. The stock has gained more than 25% year to date. While there are still concerns about how generative AI might hurt Google’s lucrative search business, search results do include AI-driven responses, alongside regular responses that drive ad revenue. A combination of paid AI and eventual ad-supported AI puts Alphabet in a decent position among peers. Like with Microsoft, Google has robust AI opportunities on the enterprise side because both have huge cloud businesses. META YTD mountain Meta Platforms (META) year-to-date performance Meta Platforms is monetizing consumer interest in AI by boosting user engagement. The Meta AI generative artificial intelligence assistant is currently free to use. You’ll see a chatbot baked into social media apps like WhatsApp, Instagram, and Facebook’s Messenger. It was placed in these services to keep people on the apps for longer — improving user experience so Meta can report back better engagement to its advertisers. In turn, the social media giant can grab more ad share by better positioning ads on Instagram and Facebook. This has, in particular, helped with monetization efforts for Instagram’s Reels. During last Wednesday’s Morning Meeting, Jim Cramer said investors may have concerns about Meta’s advertising business as Chinese e-commerce sellers like Temu and Shein pull back on their marketing spend. But Jim said these worries are overblown, citing a bullish Citi note about Meta’s ad load growth — an encouraging sign for user engagement. Shares of Meta have gained more than 42% year to date. But unlike Apple and Alphabet, Meta stock got off to a great 2024 and hit records in early April before hitting a rough patch. Since its most recent bottom at the end of April, Meta shares have been working their way up but are not quite back to all-time highs. AMZN YTD mountain Amazon (AMZN) year-to-performance Comparable to Meta, Amazon offers AI to consumers for free to increase engagement on its dominant e-commerce platform. The benefits are less apparent for Amazon’s financials than Microsoft’s because the company is not selling an AI assistant directly to consumers, yet — there are reports they plan to do just that in the future. Instead, Amazon integrates the nascent tech by generating product reviews for users and targeting specific ads. These efforts, in turn, improve the user experience by making shopping easier — while hopefully driving more sales — and keeping people on the platform for longer periods. This means more eyeballs for its so-called retail media business, a term for selling ads on traffic and using proprietary data to make money. Shares of Amazon, which have gained 20% year to date, hit records in May. Since then, the stock has come off the boil. Like Microsoft and Google, Amazon has a substantial cloud business, Amazon Web Services, which is the biggest cloud in the world. It drives Amazon revenues from its enterprise customers. Getting more AI features into AWS makes it more attractive to companies looking for cloud services. (Jim Cramer’s Charitable Trust is long AAPL, AMZN, META, MSFT, GOOGL, NVDA, BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Eugene Mymrin | Moment | Getty Images

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