As companies grow, finding new sources of revenue becomes harder once core markets mature, and Apple (AAPL) is feeling that squeeze.

Its stock has underperformed the rest of the “Magnificent Seven,” and its returns have fallen to a 15-year low.

To jump-start growth and shore up its AI efforts, Apple is exploring an acquisition of Perplexity AI to bring in ready-made generative search technology and talent.

If the deal goes through, it could give Siri and Spotlight a boost and signal to investors that Apple is serious about closing its innovation gap.

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For industry giants, maintaining growth becomes increasingly difficult as markets mature and expansion opportunities narrow.

Once a company reaches a certain scale, it must sustain momentum in the face of market saturation and intense competition.

Expanding product lines and introducing new technologies can help, but these moves often strengthen brand positioning rather than drive significant revenue gains.

True long-term growth requires innovation beyond core products, often through new revenue streams or expanding service offerings.

Apple (AAPL) currently faces these challenges.

The company has lagged behind the broader performance of the “Magnificent Seven,” a group of tech giants including Alphabet (GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), which have driven much of the market’s recent gains.

The Magnificent Seven closed last year up 55% compared to Apple with 30%.

While the cause of this performance is mainly attributed to Nvidia’s almost 200% surge due to its leadership in AI infrastructure, Apple’s growth has been more modest, even compared to other Magnificent Seven members, only surpassing Microsoft’s 15% performance.

To combat the growth challenges, the company is preparing to buy Perplexity AI as a way to catch up in the race for advanced search and generative AI.

According to Bloomberg, Apple’s mergers and acquisitions head, Adrian Perica, raised the idea with Eddy Cue and other senior services and AI executives.

These conversations are at an early stage and may never lead to a formal offer. Still, the move would give Apple its own AI-powered search engine rather than relying on Google.

It would also bring on a team of engineers already versed in large language models and search technologies, key skills Apple needs to strengthen its AI efforts.

Apple has lagged behind its peers in translating AI into products up to this point.

Microsoft backed OpenAI early and now offers ChatGPT integrations across its services. Google has leaned hard into its Bard chatbot and AI enhancements in search and apps.

Meta signaled interest in Perplexity as well, but Apple’s internal talks show it is serious about shoring up its AI chops.

Access to Perplexity’s technology and talent could speed up Apple’s work on Siri, Spotlight search and other on-device and cloud features. It would be a shortcut compared with hiring and building in-house from scratch.

Part of the urgency comes from Apple’s slipping financial momentum. Uniform Accounting shows Apple’s return on assets ”ROA” has fallen for three straight years.

In 2024, it hit its lowest level in more than 15 years, excluding the pandemic shock of 2020.

The market has noticed, and questions are growing about whether Apple can maintain growth without new breakthroughs.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will slightly improve to 42% from 36% last year.

Apple is still expected to perform well in the future but the market does not price in a significant ROA ramp-up like we see for other AI players.

iPhone sales have largely plateaued, especially in China, where Huawei’s comeback has chipped away at Apple’s market share.

Services revenue still grows at low double digits, driven by App Store, iCloud and subscriptions.

However, much of that steady cash flow has gone to repurchasing stock rather than funding new ventures.

Apple remains the world’s third-largest company by market capitalization, but size brings its own hurdles.

Growth from here is harder to come by. Each percentage point of revenue gain requires massive new sales.

At the same time, competition in hardware and services is intensifying. Tariffs on Chinese-made iPhones could raise costs or squeeze margins further if Apple passes them on to consumers.

On the software side, users expect sophisticated AI features, and lagging too far behind risks eroding Apple’s premium image.

Acquiring Perplexity could change the narrative. It would give Apple a proven generative AI engine to integrate into Siri, search, and beyond.

More importantly, it would show investors that Apple is willing to act decisively to address its recent lack of innovation.

If Perplexity’s engineers and models can deliver a step change in user experience, Apple might once again set the pace rather than play catch-up.

It would also offer a direct way to compete with Microsoft’s AI push and Google’s ongoing search dominance.

These talks are far from a done deal. Apple’s team still needs to assess whether Perplexity’s technology can scale within Apple’s closed ecosystem and meet its strict privacy standards.

There is also the question of price and how a deal would fit alongside Apple’s other priorities, like mixed-reality hardware and automotive efforts.

But an acquisition like this could be the catalyst needed to reverse these trends, injecting new life into its growth story and signaling to the market that Apple is serious about competing for AI dominance.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research