When the topic of AI comes up, it is now more common than not to frame it through the dot-com bubble analogy. Even the World Economic Forum (WEF) published an article in October warning there is a sense of “AI fatigue”. Namely, that introducing and managing new productivity tools leads to less time being saved, and time, after all, is money.
Worse yet, it appears that more time needs to be added to deal with AI-driven workslop. Likewise, the race to be first in AI leads to debt-loading that may turn sour. Amid these concerns, however, the most likely scenario is that the AI cycle will lead to even greater gains and transformation than post-dot-com bubble.
Yet, this dynamic between long-term expectations and the short-term AI bubble potential neatly fits Apple’s market positioning.
Apple and the AI Bubble: The Strength of Patience
So far in the workspace environment, AI generative tools have been less than productive. Case in point, MIT Media Lab’s report found that 95% of organizations that implemented such tools gained zero return despite pouring in $30-40 billion to make it work. The core problem seems to be that GenAI systems “do not retain feedback, adapt to context, or improve over time.”
Apple came to a similar conclusion in its widely reported ‘The Illusion of Thinking’ paper. Specifically, AI models demonstrate “fundamental inconsistencies” in how they “apply learned solution strategies across different problem scales”. This means that large language models (LLMs) need a rework on a more fundamental level than just widening the context window.
Consequently, there seems to be a performance ceiling with existing AI tech, and Apple avoided bumping into it by not pouring billions into it. For comparison, in Q3, Apple spent $12.72 billion on capital expenditures (capex), while Amazon, Alphabet, Microsoft and Meta Platforms spent $112.5 billion combined in the same quarter.
Microsoft is the largest capex spender at $34.9 billion, opposite to Meta’s modest $19.4 billion on the lowest end. Yet, Apple has been the most frugal of them all despite having the highest market cap of nearly $4 trillion, behind Nvidia’s $5 trillion recent valuation milestone.
In the end, Apple’s reluctance to chase the AI hype cycle seems to have been the more prudent approach, waiting for the tech to mature instead. Investors should also take note that Amazon’s recent firing spree has more to do with capex commitments than with work automation itself.
With that said, the AI bubble concern should not be confused with the way the likes of Palantir and Oracle leverage AI tools.
If the AI Bubble Scenario Unfolds
Based on multiple narratives of an AI bubble forming, coming from multiple angles, the tech-heavy Nasdaq 100 Index closed -2% on Tuesday. Given the weight of the tech sector, this also brought down the S&P 500 Index by -1.17%.
Over a 5-day period, the Roundhill Magnificent Seven ETF (MAGS) is now down -2.42%. In a scenario of severe deflation – AI bubble burst – Apple has stayed focused on sustainable integration while competitors have engaged in an arms race of GPU accumulation and capex escalation.
Coupled with Apple’s record-breaking stock buybacks, this would make AAPL stock the least affected in a bubble burst scenario, although it would also go down with the market re-alignement. After all, Apple reported $35.93 billion in latest Q4’s cash reserves, 20% higher from the year-ago quarter, while also lowering its total current liabilities by 6.1% year-over-year to $165.63 billion.
Trump’s Tariff Impact Keeps Piling Up
In Apple’s Q3 earnings call ending July 31, Apple CEO Tim Cook noted an $800 million tariff hit on the company’s bottom line, adding up $1.1 billion more for the latest Q4 period. Looking ahead to the fiscal year ending December, Apple’s CFO Kevan Parekh expects another $1.4 billion hit.
Altogether, Apple faces a total tariff impact of roughly $3.3 billion through 2025, beginning from Trump’s so-called “Liberation Day” in early April.
On the upside, Tim Cook noted during the earnings call that the tariff burden is “not linear to volume”, meaning that higher iPhone sales are not proportionally accompanied by higher tariff costs.
Overall, the tariff load on Apple’s business is heavy but manageable. President Trump helped by exempting Apple imports when he raised secondary 25% on Indian imports, as of late August, to a baseline of 50%. The company is still heavily reliant on China’s and India’s manufacturing capacity, which only lends credence to President Trump’s push for domestic onshoring.
To that end, Apple expanded its American Manufacturing Program (AMP) commitment of $500 billion, first announced in February, by another $100 billion in August, stretching out over the next four years. In the meantime, Apple’s gross margin for Q4 not only held up but increased 10.2% from the year-ago quarter.