Could Apple’s cautious approach to AI turn out to be the smart move?
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16 July 2026
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Some analysts believe Apple is at risk of falling behind in the AI race due to its slow adoption and the delayed roll-out of advanced features.
Critics point to the recent revamp of its natural language interface Siri, which was unveiled at the Worldwide Developers Conference and met with a decidedly muted response from investors.
Rather than building its own foundational AI technology, Apple is partnering with companies like OpenAI and Alphabet-owned Google alongside integrating third party technology into its devices.
There is a view that this approach could damage Apple’s image as an innovator and turn the iPhone into a ‘delivery mechanism’ for competitors’ technology.
Analysts at Morningstar see this as a problem because historically, Apple’s innovations have acted as a hook for consumers to upgrade to the latest iPhone and other Apple devices, creating a flywheel effect.
Staying out of the AI arms race
Apple’s caution might be vindicated if the AI arms race turns out to involve billions of wasted capital expenditures, not able to earn a decent return.
In contrast to hyperscalers like Alphabet, Microsoft, Amazon and Meta who are depleting their cash resources and adding debt to their balance sheets, Apple has net cash of $54 billion on the balance sheet, giving the company financial flexibility which its competitors are foregoing in their hunt for AI dominance.
Apple is essentially making a bet that owning the interface and the device, and pushing its best-in-class privacy and security standards will be more important for its customers in the long run.
How does Apple’s spending compare?
It is worth taking a moment to consider the significant differences in capital expenditures and free cash flows that analysts are projecting for Apple compared with the hyperscalers.
As the tables show, Alphabet is forecast to allocate $238.5 billion to capital expenditure in 2027, nearly 20 times more than Apple is expected to spend.
Consequently, analysts believe Apple’s free cash flow will be almost 10 times that of Alphabet ($151.3 billion versus $16.8 billion) in 2027. Free cash flow is the money left over after deducting all expenses, taxes and capital expenditures from revenues.
Apple generates oodles of free cash flow, which represented 36% of annual revenues and around 90% of earnings per share in 2025.
Apple is a share buyback machine
Apple has been regularly buying back shares and reducing the cash on its balance sheet over the last decade.
Share repurchases took a notable step up after the 2017 US Tax Cuts and Jobs Act allowed Apple to repatriate its overseas cash pile at a reduced rate.
Since fiscal 2012 through the first quarter of 2026 Apple has returned a cumulative $1.2 trillion to shareholders through buybacks and dividends.
Analysts are projecting a further $108 billion of share buybacks and $16.2 billion of dividends in fiscal 2027.
Apple has reduced its net cash pile from $153 billion in 2012 to $54 billion at the end of the second quarter 2026.
Shares repurchased and cancelled reduce the share count which mechanically increases earnings per share. Over the last 11 years, roughly two-thirds of earnings growth has come from the effect of share buybacks.
How does Apple make money?
The iPhone generates half of group revenues, but it is far more important than just a piece of well-designed hardware because it is also the gateway to 2.5 billion active users who sit at the heart of Apple’s money-making machine.
Apple just doesn’t sell phones; it is increasingly becoming a services business fuelled by recurring subscription revenues, which generate double the margins achieved by the hardware business, growing two to three times faster.
What matters is how much the installed user base will spend over the coming years across Apple’s services hub. As long as iPhone sales keep chugging along at 4% to 5% growth, the installed base keeps widening.
Services now comprise more than a quarter of group revenues and are likely to grow to around of third over the next five years.
Within the $109 billion service revenue segment, the App Store is the largest, generating revenues of $32 billion, with the remainder spread across iCloud, Apple Music, Apple TV+, Apple Pay, advertising, and AppleCare.
The App Store averaged 850 million weekly users globally in 2025, with Apple typically taking a 15% to 30% commission on app purchases and subscriptions.
Underappreciated advertising opportunity
Advertising is Apple’s fastest-growing sub-segment and possibly one of the least appreciated by investors. Within the App Store search results are controlled by Apple which means it creates valuable ‘high intent’ users.
Indirect advertising is dominated by Apple’s deal with Google, which independent analysts estimate the latter could be paying Apple around $25 billion a year to remain the default search engine on Safari.
The smallest segments including Mac, iPad and Wearables, which collectively bring in another $100 billion of annual revenues.
What is Apple’s strategy?
Apple’s strategy is simple and effective: to sell premium hardware which attracts customers into its ecosystem and keep them there.
Like many successful businesses Apple operates a vertically integrated business model. It designs its own chips (A-series, M-series), operating systems, apps, and it owns the retail experience and distribution.
Apple never competes on price but on desirability, which limits the markets in which it can operate but also protects the brand’s identity. It also protects margins as seen recently when Apple announced price hikes related to the rising cost memory chips.
Increasingly, Apple’s strong privacy policy is becoming a key competitive advantage against the likes of Google and Meta who have been accused of data-harvesting and allowing bad actors to exploit their customers.
How does Apple’s valuation stack up with competitors
Because Apple is vertically integrated it faces competition across several industries including hardware, software, and digital services in entertainment, media and financial services.
For practical purposes, Apple is commonly compared with the large US technology companies and looking at these, Apple trades on a premium 12-month forward PE (price to earnings) ratio of 35 times.
To give some historical context, this is the highest forward PE Apple has traded on since November 2007, when it reached 37.6 times.
Interestingly, in 2011 Microsoft traded on a forward PE of just 9 times while Apple was on 10 times, and Google was on 14 times, while Meta was yet to make its debut on the stock market.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
