Apple incoming CEO John Ternus faces a defining challenge: Fixing the company’s AI strategy

Apple has maintained its dominance in consumer devices and built up a $4 trillion market cap despite largely sitting on the sidelines of the artificial intelligence boom. But investors won’t remain patient forever, and they’ll be looking to new CEO John Ternus for a clearer strategy when it comes to playing in the hottest market on the planet.

Tim Cook’s 15-year tenure as Apple CEO comes to an end on Sept. 1, the company announced on Monday. Ternus, Apple’s longtime hardware boss, is taking over, becoming just the second leader since Steve Jobs departed in 2011, less than two months before he died from cancer.

As Cook exits, Apple faces numerous challenges, including an intricate supply chain that’s complicated by geopolitical tensions and soaring prices for memory due to unprecedented demand from the AI buildout. But for Ternus, perhaps the most critical aspect of his new job will be pushing the company deeper into AI, where it’s lagged many of its megacap peers.

So far, Apple’s AI strategy has involved avoiding hefty capital expenditures while Microsoft, Google, Amazon and Meta commit to hundreds of billions of dollars a year in combined capex to fund new data centers and fill them with pricey AI chips. When it comes to developing a foundational AI model, Apple has punted there as well, and is instead counting on Google’s Gemini to power its AI features, including a major Siri upgrade expected later this year following a delay.

In 2024, Apple launched Apple Intelligence, which includes image generators, text rewriters, the ability to summarize push notifications and an integration with OpenAI’s ChatGPT. Consumer response has been mixed, but Apple continues to sell boatloads of iPhones, and users are getting plenty of AI options on those devices —just from other companies.

ChatGPT and Anthropic’s Claude are currently the two most popular free iOS apps, with Gemini at fourth and Meta AI at eighth. Meanwhile, Apple is betting that within a few years, hefty workloads will run on a chip inside the phone, which will play to its strengths as the company has been integrating AI-capable silicon into its devices since 2017.

“By choosing a hardware leader in John Ternus, Apple may be signaling that it still believes the future of AI will run through tightly integrated devices, not just software,” said Timothy Hubbard, assistant professor of management at the University of Notre Dame.

For the moment, Apple is getting plenty of growth from iPhone sales. In the latest quarter, iPhone revenue surged 23% from a year earlier to $85.3 billion, a jump the company attributed to strong sales of the iPhone 17 models released in September.  

Cook said at the time that iPhone demand was “simply staggering.” The company is scheduled to report fiscal second-quarter results next week. Cook will still be CEO for that report, but investors will have plenty of questions directed at Ternus and where he sees Apple headed.

AI-enabled hardware appears to be where the market is going through some combination of wearables, robotics, spatial computing or possibly something Apple hasn’t shown yet. In January, Bloomberg reported that Apple will be accelerating the development of three upcoming AI wearables all built around Siri: smart glasses, a pendant and AirPods with cameras.

Apple is also expecting to introduce a foldable phone, which Ben Bajarin, CEO of Creative Strategies, called “the most consequential hardware moment in years.”

“I think the biggest question is what comes after the iPhone,” Bajarin told GWN in March. “These are mature categories and we have no idea what comes after that but we do know it will be some form of AI hardware.”

Ternus, 50, will also face the challenge of pushing AI in the services area of Apple’s business, where the company relies on iPhone users paying for subscriptions to AppleCare, iCloud, Apple TV+ service, and using Apple Pay. When consumers upgrade to paid versions of ChatGPT, Claude and other generative AI services and chatbots, Apple gets a cut.

Forrester analyst Dipanjan Chatterjee said that in the coming years, “the seas will be turbulent for Apple because there’s been so much change in how consumers interact with technology,” particularly with generative AI.

Ternus will also have to decide whether the company continues with its emphasis on privacy, or whether it embraces AI-driven personalization. For Cook, Apple’s privacy-first approach to user data has long been a differentiator compared to other tech giants like Meta and Google, which specialize in letting brands target users with ads.

Gene Munster of Deepwater Asset Management told GWN’s “Closing Bell: Overtime” on Monday that his firm recently bought more apple stock due to its prospects in “personalized AI.”

“There’s an opportunity for Apple to tell a story to investors that could be quite compelling that they’re going to get this,” Munster said.

Nowhere in Monday’s press release announcing the CEO shift did Apple mention AI. Rather, the sections on Ternus focused on his 25 years at the company and his instrumental role in “the introduction of multiple new product lines, including iPad and AirPods, as well as many generations of products across iPhone, Mac, and Apple Watch.”

But it’s clear that when the Ternus era begins in a little over four months, AI will have to be front and center. And Notre Dame’s Hubbard said Apple is going to have to return to its roots, at least when it comes to innovating.

“The very strengths that made Apple dominant — that rapid innovation is where Apple started, and maybe that’s where the company needs to return,” Hubbard said.

—GWN’s Jonathan Vanian contributed to this report.

WATCH: Expect more hardware innovation from John Terrnus