Apple Is Playing an Expensive Game of AI Catch-Up — Heard on the Street — WSJ

By Dan Gallagher

Apple has finally parked its expensive car dreams. The timing is good, as its other ambitions require a lot of gas in the tank.

Apple took the formal step recently of telling employees on its car project — dubbed Project Titan — that it is shutting down the program and redirecting its efforts toward generative artificial intelligence, The Wall Street Journal reports. Neither are terribly surprising moves. The car effort has been under way for at least a decade with various starts and stops but ultimately made little sense for a company with no experience in producing any form of vehicle — and powerful reasons to avoid such a low-margin business.

Generative AI, meanwhile, is the hottest thing going in tech. It is now the prime focus of Apple’s big-tech competitors and has turned chip maker Nvidia into the third most valuable U.S. company — behind Apple and Microsoft. And Apple’s perceived lagging in the AI race has been costly, contributing to a nearly 7% decline in its stock price this year as Microsoft’s shares have jumped 10%, making the company that once actually made the Windows Phone about $280 billion more valuable than the company that pioneered the iPhone.

But even a cheaper Apple has no shortage of resources. The company produced nearly $107 billion in free cash flow last year — the highest by far among S&P 500 companies, according to data from S&P Global Market Intelligence. It also has nearly $65 billion in cash on its books, net of debt. Those resources are what allowed Apple to chase such an ambitious dream like building its own car without sparking an investor revolt. The New York Times reported that Project Titan consumed more than $10 billion of Apple’s cash over its lifetime. The iPhone alone now generates more than 20 times that amount in revenue every year.

Apple, though, still faces an expensive game of catch-up. Components to power generative AI services — such as the GPU systems made by Nvidia — are expensive and hard to come by of late, given soaring demand and production bottlenecks. And Apple will be competing for those chips with the same big-tech peers that have been outspending the company in some key ways. Apple’s total capital expenditures for the calendar year 2023 were about $9.6 billion — about a third of what Microsoft, Google-parent Alphabet and Facebook-parent Meta Platforms spent on average on capex over the same period, according to S&P Global Market Intelligence.

And while Apple’s total R&D outlay of just under $30 billion last year was the fifth highest in the S&P 500, it represented less than 8% of its annual revenue — among the lowest proportion of major tech companies on the index. R&D spending by Microsoft, Amazon, Alphabet and Meta last year averaged more than 17% of their reported revenue.

Hence, Apple simply siphoning investment dollars from its car project to AI might not be enough. Particularly since many generative AI services require the backbone of massive computing networks that Apple’s big tech rivals have spent years building out, due to their focus on corporate cloud computing. Apple has 26 data centers operating globally compared with more than 300 each for Microsoft, Google and Amazon, according to estimates from IT market research firm Dell’Oro. Those three also spent about nine times as much as Apple on average on data center capital expenditures last year, according to Dell’Oro analyst Baron Fung.

Of course, no one really knows what exact form Apple’s AI efforts are going to take. The company might just end up following the trend of other PC and smartphone makers by adding AI processors to its gadgets. In a Feb. 20 note to clients, Toni Sacconaghi of Bernstein said “even modest AI capabilities could potentially stimulate incremental iPhone upgraders,” in part due to weak demand over the last two cycles for Apple’s storied smartphone. A smarter Siri might actually be worth buying.

Write to Dan Gallagher at dan.gallagher@wsj.com

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