Struggling shares of Alphabet and Apple jumped Monday on a Bloomberg report saying the companies are in talks for Google to license its Gemini AI model for use in future iPhone releases. If true, this looks like a win-win for the two Club holdings, both of which have had their own issues in the generative artificial intelligence race. The concerns around Apple are fears about it being late to the AI game. However, Apple has not turned into the ubiquitous consumer technology it is today and the second most valuable U.S. company by being first to market. Apple, instead, comes in later and establishes the market by making better mousetraps. One day after reports the decadelong Apple Car project was dead and the resources would be shifted to artificial intelligence, CEO Tim Cook told shareholders last month that Apple sees “incredible breakthrough potential for generative AI, which is why we’re currently investing significantly in this area.” Alphabet, on the other hand, had been working for decades on AI and getting beat to market by ChatGPT from Microsoft-backed startup OpenAI worried investors. In response to ChatGPT, Google did not do itself any favors by rushing Bard to market last year and recently running into a viral firestorm over the historically inaccurate images its Gemini AI photo generator churned out. The Gemini image feature was quickly pulled for more testing, and corners of Wall Street were questioning whether Alphabet CEO Sundar Pichai should go. While Microsoft may be viewed as the current AI leader, Alphabet linking up with Apple could change the dynamic thanks to the latter’s massive installed base of over two billion active devices; iPhones are roughly 75% of that. It would be a major win for Alphabet both in terms of investor sentiment and user adoption, which should, in turn, provide the Google parent additional means of monetizing its vast investments in the groundbreaking technology. The Bloomberg report notes that Apple has also held talks with OpenAI, but that a tie-up with Alphabet would expand the companies’ existing partnership through which Google is the default search engine on Apple devices. CNBC could not independently verify the Bloomberg report. Apple declined to comment and Alphabet did not immediately respond when contacted by CNBC. “Apple doesn’t need to build AI. It can partner with the best because of its 1.5 billion installed base of iPhones,” Jim Cramer said Monday. At this point, the possible financial terms of a potential deal are unknown. However, in a note to clients Monday, analysts at Wells Fargo estimated a generative AI upgrade to Apple’s Siri could boost usage of the digital assistant by about 50%, to around 450 million queries per year. If half of those queries lean on the Gemini model, the firm estimates a $4.8 billion sales opportunity for Alphabet, resulting in an additional $1.4 billion in operating income and 9-cent increase to earnings per share. In its successor to Bard, Alphabet has three versions of Gemini: Ultra, Pro, and Nano. The Nano version is designed for on-device tasks, meaning it doesn’t rely on transmitting data back to the cloud. It’s unclear whether Apple would go for the more limited on-device version or the more robust cloud-based version. It likely depends on how exactly Apple would seek to leverage the Gemini model. An on-device approach seems to be more in line with Apple’s intense focus on user privacy, especially if it’s the type of integration that would allow AI to access an iPhone user’s photos, calendars, contacts and health data, and so on. On-device processing should certainly be possible thanks to the speed offered by Apple’s custom silicon. The aforementioned Siri is an obvious area in need of a generative AI upgrade. That said, we do know that Apple has been hard at work on its own generative AI model, Ajax. So, it’s possible that Apple’s model isn’t as far along as many had thought, or that Apple seeks to lean on Ajax for the more privacy-oriented tasks and use a more robust version of Alphabet’s Gemini model for those more taxing tasks where privacy is not as great a concern. What ultimately comes of this remains to be seen, but Apple’s annual Worldwide Developers Conference (WWDC) in June seems like as good a time as any for an official AI announcement. GOOGL YTD mountain Alphabet YTD Alphabet’s single-session 5% increase on Monday’s report is not something we’re going to chase. It’s just not our style, and the news is not yet confirmed. The stock’s 6.5% year-to-date gain is second only to Apple’s 9% decline in 2024 as the worst performers of our Super Six mega-cap tech stocks, which also include Amazon , Meta Platforms , Microsoft and Nvidia . However, if true, this would prove a major, and much-needed, win for Alphabet in generative AI. It would boost investor sentiment and provide Alphabet an opportunity to monetize its AI investments. We’ve already seen that from Microsoft with its Copilot artificial intelligence assistant, and we’ve been thus far disappointed in Alphabet’s efforts. This is exactly the kind of thing that we need to see from Alphabet to get us feeling better about the position. Ahead of Monday’s news, we felt Alphabet stock couldn’t be bought because the team wasn’t executing. However, we also felt it couldn’t be sold because Alphabet has a monstrous amount of cash and generates incredible amounts every quarter, providing significant optionality. Monday’s news is an example of that optionality at play. If Alphabet shares come in a bit or consolidate then we may get an opportunity to upgrade shares back to our 1 rating. Jim said on CNBC on Monday, “My Charitable Trust owns it, and we have just been lamenting Alphabet for months. Well, no lamentation today.” Any Alphabet-Apple AI partnership would be sure to draw regulatory scrutiny, but we can cross that bridge when, and if we get to it. AAPL YTD mountain Apple YTD As for Apple, we’ve been expecting an update on its generative AI efforts at some point this year. Monday’s news isn’t quite the update we were looking for, but it does serve to increase our confidence that something more material and definite is going to be announced at this year’s WWDC. By implementing artificial intelligence into the core of the iPhone, not simply as some app or browser-based tool, we could finally see features on the next iPhone, beyond a better camera and minor enhancements here and there, that prompt a major upgrade cycle – a true AI iPhone. (Jim Cramer’s Charitable Trust is long GOOGL, AAPL, AMZN, META, MSFT, NVDIA. 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 . 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A smart phone displaying Google with Google Gemini in the background is being featured in this photo illustration in Brussels, Belgium, on February 8, 2024.
Jonathan Raa | Nurphoto | Getty Images
Struggling shares of Alphabet and Apple jumped Monday on a Bloomberg report saying the companies are in talks for Google to license its Gemini AI model for use in future iPhone releases. If true, this looks like a win-win for the two Club holdings, both of which have had their own issues in the generative artificial intelligence race.
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