2024: The Year the iPhone is Falling Behind
As Artificial Intelligence Is Redefining the Smartphone, Apple no Longer Deserves to be Priced for Perfection
Review: My big Call of 2023
This January I predicted that 2023 would be the year the market realizes that Meta’s moat is larger than Google’s. The post gained quite some traction on X (formerly twitter), as it was considered a pretty bold call at the time. Meta was still trading at a dirt cheap valuation with the share price at $124. Less than 12 months later, Meta is up 168%. While Google also had a good year, its only up about 50%. Today Meta trades at a PE ratio of 29.4 and an EV/EBITDA multiple of 17.5. Google on the other hand trades at a PE of 26.2 and an EV/EBITDA of 17.2. My view has thus been proven right by the market as Meta successfully fended off competition from Tiktok and made great strides in AI, whereas Google’s moat came into question following the rise of OpenAI and Microsoft and the threat it represents to Google’s search business.
Google’s share price came particularly under pressure after Microsoft CEO Satya Nadella said he wanted to make Google “dance” thanks to the launch of the new AI-powered Bing search engine made in collaboration with OpenAI.
Satya Nadella said in an interview with The Verge he hopes the "new Bing" will make rival Google "come out and show that they can dance…and I want people to know that we made them dance, and I think that'll be a great day."
Google Just Entered the Dancefloor with Gemini
Google did accept the invitation for the dance. While the release of google bard was a little bit underwhelming so far, google finally did convince the market with the introduction of Gemini, their largest and most capable AI model so far. The share price jumped a whopping 5% following the release that may put google on par or perhaps even ahead of ChatGPT:
Perhaps the most remarkable part of the Gemini release was a short video that went pretty viral:
Google did admit that the demo video was edited, but it finally came out with a really promising vision. If Gemini really comes close to this vision near term, it may well imply game, set, match vs ChatGPT. The integration of camera, video, voice and AI cannot be matched by OpenAI at this point.
The Smartphone of the Future
Interestingly, the Google video may also explain the recent news about OpenAI trying to build the “iphone of Artificial Intelligence.” Who on earth would try to enter the smartphone market and compete with Apple? Well, some high profile individuals seem to have identified a gap that is not well addressed by Apple. And it is no lesser than famous iPhone designer Jony Ive:
According to a new report by the Financial Times, OpenAI CEO Sam Altman is looking to use Ive’s design firm LoveFrom to develop OpenAI’s first consumer device, with the duo having discussed what such a product would look like during brainstorming sessions at Ive’s San Francisco studio. News of the venture was first reported by The Information on Tuesday. According to three people familiar with the plan, Ive and Altman are aiming to create a device that provides a “more natural and intuitive user experience” to interact with artificial intelligence.
Gemini Nano is an Open Attack by Google on Apple’s iPhone
All eyes regarding the Gemini release have been on the ChatGPT comparison. However, I believe the market has been overlooking a very important implication of the Gemini release: Given Google’s ambitions with the Pixel phone, the release of Gemini nano represents a direct attack on Apple’s iPhone. I am convinced that this has been the opening of a new storyline that will gain increasing traction in 2024.
Gemini Nano is our most efficient model built for on-device tasks, and starting today, it's running on Pixel 8 Pro. As the first smartphone engineered for Gemini Nano, it uses the power of Google Tensor G3 to deliver two expanded features: Summarize in Recorder and Smart Reply in Gboard. Gemini Nano running on Pixel 8 Pro offers several advantages by design, helping prevent sensitive data from leaving the phone, as well as offering the ability to use features without a network connection. In addition to Gemini Nano now running on-device, the broader family of Gemini models will unlock new capabilities for the Assistant with Bard experience early next year on Pixel.
For now, the two most exciting features of Gemini Nano are “Summarize in Recorder” that allows Pixel users to get a summary of your recorded conversations, interviews, presentations and more — even without a network connection.
Perhaps even more important for daily use is that Gemini Nano will starting to power Smart Reply in Gboard, soon available to try with WhatsApp and coming to more apps next year. The on-device AI model can save time by suggesting high-quality responses with conversational awareness.
The full AI capabilities are described in Google’s blog post. What I personally also find very promising is the announcement that
“The broader family of Gemini models will unlock new capabilities for the Assistant with Bard experience early next year on Pixel.”
At this point we can only speculate, but it is not hard to imagine that the Assistant powered by Gemini my access your Gmail, Photos, and more in intelligent ways.
What seems clear is that google is stepping on the gas pedal and quickly rolling out its AI features on Pixel, and perhaps soon on Android. Satya Nadella’s invitation for a dance may thus have the unintended consequence that it is not Google that is making Apple dance. The most recent Pixel Phone add is directly mocking slow moving Apple that is famous for one annual software update a year.
What Does the AI Race Mean for Apple?
So far Apple has largely been left out of the AI discussion. While Apple doesn’t have any promising AI products, it has not stopped the share pricing from rising in line with the “Magic 7”. Year to date, Apple’s share price is up 51% at this point despite lackluster fundamentals. The company fails to grow revenues yet still trades at a highly elevated PE ratio of 32. I consider this valuation as “priced to perfection” for a company that is not growing.
While Apple has a long history of smart assistants with Siri, people tend to make fun of it and don’t consider it artificially intelligent, especially not the latter. The fact that the market has obviously not punished Apple so far for a lack of AI initiatives may have to do with its ownership of the powerful iOS platform. Perhaps the market and even Apple itself are believing that “there will be an app for it and it will run on iOS and make Apple money.” After all, OpenAI’s ChatGPT is one of the biggest hits in the app stores this year.
I believe this view may turn out misleading. A single app, unless offered by apple itself and powered by its own AI model, cannot live up to the promise of a personal AI assistant that Google can deliver on Pixel. Artificial intelligence, as evidenced by the sad state of Siri is Apple’s Achilles heel. Google’s current attack with the Pixel phone is only the beginning and it should be expected that the capabilities will be rolled out across Android near term. Moreover, OpenAI’s daring to create a smartphone for the era of AI is another strong evidence that the iPhone ecosystem is leaving a gap that can be addressed by other players.
Meanwhile Apple has demonstrated a notorious lack of innovation in recent years. The iphone design has not changed in three years and the software and camera improvments are more and more marginal every year. Yes, the iPhone is rock solid, but its also super boring. Personally, I have been inclined to try something new but there has never been a strong enough trigger. My hope for more “smartness” in a “smartphone” has always been on Google’s Pixel phone, but it has never been enough. Until now. Google Bard, Gemini Nano, and the credible promise for near term integrations are enough for me to finally pull the trigger. I have order the Pixel 8 Pro. I believe that anyone in the knowledge economy will strongly reconsider in the near future blue checks beat true smartness. My expectation is that a new era of smartphones has just begun.
As it relates to Apple, I believe the position of the iphone is under attack. At the very least uncertainty has gone up. Maybe they will be able to fight back. Maybe there will be a one app fits all solution and Apple can even monetize it on the AppStore. But as I have laid out, I think only owning the complete device, including the AI chip, the AI model, and all apps and integrated datapoints will allow for a truly smart and personalized experience.
I am confident Google’s pixel phone will increasingly sell better, but it won’t be enough to significantly impact iPhone sales in 2024. However, I believe the market will get increasingly nervous about the implications of the AI revolution for smartphones and start to question Apple’s progress. If Apple does not deliver a compelling and convincing vision for the AI era next year, I expect Apple will no more be price for perfection. This could imply a PE ratio below 20. I would not be surprised if Apple’s share price falls by one third or more in 2024.
This is not investment advice or should be construed as such. I am simply sharing my journey and thoughts!