Apple Spends AI Dollars Cautiously

Last month, Apple (AAPL) reported its quarterly earnings that continued to outpace all market expectations. The market was buoyed by the high demand for the latest iPhone, and that sent the stock climbing 16% in the after hours trading session.

Apple’s Financials

Apple’s first quarter revenues grew 16% to $143.8 billion, ahead of analyst expectations of $138.5 billion. EPS of $2.84 was also ahead of the Street’s forecast of $2.67.

During the quarter, iPhone revenues grew a staggering 23% to $85.3 billion, far ahead of the market’s estimates of $78.7 billion. Mac sales fell 7% to $8.4 billion falling short of the estimates of $9 billion. iPad sales grew 6% to $8.6 billion and were ahead of the Street’s outlook of $8.1 billion. Apple’s Services revenues came in line with the market’s estimates of $30 billion. The wearables division fell 2% to $11.5 billion, and missed analyst estimates of $12 billion.

In other key metrics, Apple now has an active base of 2.5 billion iPhones, Macs and other Apple devices, compared with 2.35 billion reported last year. Apple also saw a strong performance in China, Hong Kong, and Taiwan where sales grew 38% during the quarter to $25.53 billion.

For the second quarter, Apple estimates revenues of $107.8-$110.7 billion compared with the market’s estimates of $104.8 billion.

Apple’s AI Growth Strategy

Apple believes that it will face a supply constraint for its iPhone demands. The constraints are not expected to ease off soon given the high demand for chips for AI. Analysts expect that there will be a shortage to meet worldwide demand of chips because of the high demand from AI giants. Prices for computer memory are expected to rise more than 50% this quarter alone, raising questions on how Apple will handle the shortage and rising costs. While Apple did not see a significant impact on the pricing in the last quarter, it expects a bigger effect during the second quarter. Apple won’t be the only one to face the issue. Last November, Dell (DELL) already announced that the cost basis of all its products will go up because of the memory shortage.

Unlike other tech players that are pouring investments in AI capacity and infrastructure build-out, Apple has been playing cautiously. Its capex spends fell to $2.4 billion for the quarter from $2.9 billion a year ago. Instead, the company has been investing in R&D, where expenses increased to $10.9 billion from $8.3 billion a year-ago.

Keeping with the theme, Apple recently announced its partnership with Google (GOOGL) Gemini to power its AI features, including the much-awaited Siri upgrade. As part of the multi-year agreement with Google’s Gemini, Apple will pay Google an estimated $1 billion a year for access to Google AI.

Apple will continue to drive its AI objectives by letting Google work on the more “laborious” task of development of core AI models that requires the much-needed computing capacity. The deal is expected to expand to other Apple Intelligence features beyond Siri. While Gemini will power some cloud-based features, Apple will continue to use its own models and private cloud compute capability to ensure its high privacy standards are maintained.

Apple currently partners with OpenAI to integrate ChatGPT into Siri and Apple Intelligence. It is not very clear on how that relationship will transpire. Apple has already delayed the much anticipated launch of the AI voice upgrade for Siri which was originally planned for last year to 2026.

Apple’s stock is trading at $255.78 with a market capitalization of $3.9 trillion. It touched a 52-week low of $169.21 in April 2025 and climbed to a 52-week high of $288.62 in December last year.