Is This What Apple Stock Needs to Turn Things Around?

Key Points

• Apple is reportedly in talks to acquire Perplexity AI.
• Perplexity is worth $14 billion based on a recent funding round.
• Apple's stock has been underperforming as investors have grown frustrated with its slow rollout of AI features for its iPhones.

Apple (NASDAQ: AAPL) is one of the most valuable companies in the world, with a market cap of $3.17 trillion. But the stock is down 15% since the beginning of the year (as of July 7). Investors are concerned about the stock's growth potential, as the delayed rollout of artificial intelligence (AI) features for its iPhones could leave the business scrambling to keep up with its rivals.

But recently, Apple has been linked to a possible deal to acquire a major AI company. Could this be just what the company needs to turn things around and spark a rally in its share price?

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Apple reportedly looking at acquiring Perplexity AI

According to a recent report from Bloomberg, Apple is contemplating the purchase of Perplexity AI. The company's chatbot is one of many popular alternatives to OpenAI's ChatGPT. Perplexity AI is focused on developing a chatbot designed as an answer engine, prioritizing real-time web search and accurate, cited answers. There are an estimated 15 million active monthly users on Perplexity. While that puts it nowhere near ChatGPT, which averages 400 million users each week, Perplexity has become one of the prominent chatbots out there, and it has been growing in popularity.

The move can potentially make a lot of sense for both Apple and Perplexity, with the AI company being worth around $14 billion, based on a recent funding round. For Apple, while that would be a big acquisition, it wouldn't be hard to fund the deal; as of the end of March, the tech giant had more than $28 billion in cash and cash equivalents on its books. For Perplexity, having a company with deep pockets to help fund its growth could help it to better compete against ChatGPT and other chatbots.

Why a big AI acquisition may not necessarily solve Apple's problems

An acquisition of Perplexity AI or another similar AI company would instantly enhance Apple's capabilities. Apple would be less dependent on other chatbots if it had one of its own. And it would acquire the AI talent it needs to position itself for greater AI-related growth opportunities in the future.

But the big problem may come from higher up, with Apple's management taking a conservative approach to AI and focusing on security and privacy over speed. Perplexity has run into problems with copyright infringement, which could lead to costly legal bills and may lead to the need for safeguards.

Plus, the core issue at hand is incorporating advanced AI features into Apple's iPhones, not necessarily the company having its own chatbot. Apple has delayed some AI features for its iPhones until next year. And without next-gen features, customers may see little reason to upgrade their iPhones. iPhone sales over the past six months have essentially been flat year over year at around $116 billion.

Is Apple a good buy right now?

Apple hasn't announced a deal to acquire Perplexity, and there is no reason to believe that an acquisition is imminent. But I do believe that Apple, with its massive stockpile of cash, can dig itself out of its current hole. One big acquisition could transform its growth prospects, though it may not be a quick or easy fix.

And with the stock trading at 31 times its trailing earnings, I don't think it's cheap enough to buy given its struggles and limited growth of late. I would want more of a discount before buying the stock to ensure a bigger margin of safety.