The Apple trust premium in the age of AI

The new folding-screen iPhone will set you back $1,999 for the base model — new territory for an Apple handset. Apple’s stock is even more expensive, though. Trading at 36 times the coming years’ expected earnings, its valuation multiple is higher than it has been since the early days of the iPhone, when the company was growing like wildfire.

This summer, Apple has opened up a big, sustained valuation premium over Microsoft (25), Alphabet (26), Amazon (27), Nvidia (18) and Meta (21). Among the “Magnificent Seven” only Tesla has a richer price-to-earnings ratio — and only because it is inflated by low earnings.

Apple never approached the top spot on the valuation table, even briefly, before late last year. For many years, its multiple was depressed by fears that its dominance in phones would prove fleeting, as Nokia’s and BlackBerry’s did. And then its growth rate was slow by big tech standards. That latter point remains true: the market expects Apple’s earnings to grow at a high single-digit rate in the next few years, slower than its big peers. The company also faces new challenges, notably input cost inflation and slowing growth in its services business. And yet its valuation is pulling away. Why?

Explaining stock markets is more art than science, but here’s an informed guess: Apple’s valuation reflects investors’ desire to own tech stocks that are not concentrated bets on AI. “Apple tends to be countercyclical from a risk appetite perspective,” says David Vogt of UBS. A year or two ago, when enthusiasm for AI was running hot, there was no Apple premium to speak of. “What has changed is the view that doing billions in capex to support the AI model makers might not be the best investment.” Apple is more or less sitting out the AI money fight.

Even before the latest wave of worries about the existential risk from self-improving frontier AI models, then, markets were signalling discomfort with the AI trade by giving Apple a premium. Having AI chief executives concede that they might lose control of their own technology, just as they are preparing for public listings, will not put anyone at ease. But there is more to the Apple premium than the absence of AI risk in a market crammed with the stuff; Apple is selling trust in a world that is increasingly short of it.

Privacy is a cornerstone of Apple’s sales pitch. Former boss Tim Cook almost never made a public presentation without hammering on Apple’s promise to keep customers’ data safe, even from Apple itself. The new CEO John Ternus followed the pattern at the start of the new phone launch. “Apple Intelligence” — the AI tool that the company is building into its devices — runs locally where it can, and uses an encrypted “private cloud” when more computer power is required. Other companies “see [your] data as something to collect”.

The pitch has worked brilliantly at keeping Apple customers loyal; iPhone users almost never switch to other brands. And trust is exactly what the AI companies are missing right now and will need to establish if they are to live up to Wall Street’s dizzy expectations.

Trust is built on accountability, but the AI companies — from hyperscalers like Google to model builders like OpenAI and Anthropic — have been unable and unwilling to make themselves accountable. Apple, in the internet age, promised: “your data will be safe.” The AI companies cannot even promise that their product will not go rogue and harm you. Instead, they have focused on what someone else — the industry as a whole, third-party monitors, the government — needs to do to make sure their technology stays under control. Anthropic CEO Dario Amodei’s letter calling for an industry “pause” is best read as an effort to socialise, rather than accept, accountability for product safety at his company. Until he and his company start making hard commitments, in the way Apple did with privacy, trust will remain beyond reach.

This is not to say that the Apple premium is safe in the age of AI. The company wants its devices to be the best host for AI services. In order to do that without spending hundreds of billions on its own AI infrastructure, its foundation models will run on Google’s infrastructure. It remains to be seen whether this collaboration, and the attendant loss of complete control, can deliver a great experience while honouring the promise of privacy.

Apple is often described as a “walled garden” where the user experience is carefully cultivated. But AI does not like walls. So while AI companies should look to Apple’s trust-building model, Apple’s own model is going to have to change too.

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