Apple Has Dropped the Ball on AI. Buying Perplexity Could Help It Catch Up, Say Analysts.

Apple has shown interest in striking a deal with Perplexity AI, the artificial intelligence-powered search engine and chatbot, according to a report. (Getty Images)

Apple is fresh out of luck. The iPhone maker must act fast to capitalize on artificial intelligence before it’s too late—and an acquisition could be the answer.

That’s according to Wedbush analysts, who made the case for a deal with AI search engine Perplexity in a note Wednesday. The company has shown interest in acquiring the start-up, according to a report.

While hyperscalers like Alphabet, Amazon.com, and Meta Platforms have seized the opportunity to monetize AI, which the firm dubs “the biggest tech trend in the last 50 years,” Apple remains sidelined, “watching this 4th Industrial Revolution race go by at 100 miles an hour.”

The iPhone maker boasts a massive active installed base with more than 2.35 billion active devices. Consequently, Apple still stands a chance to snap up market share over its more entrenched competitors, according to Wedbush analysts led by Dan Ives. However, “that window is narrowing and it’s a worrying dynamic.”

Analysts repeatedly have sounded the alarm about Apple’s failure to execute on AI, holding the company out as a notable laggard versus industry peers. The delayed rollout of Siri with AI integration, and the subsequent lack of clarity about a release date, has dragged on shares. Management failed to provide a timeline during Apple’s annual developers conference last month.

According to Wedbush, the solution to Apple’s woes is simple. “The time has come,” the analysts declared. “Apple needs to acquire Perplexity to significantly boost its AI platform.”

While the company has been “fearful of acquisitions historically,” developments are occurring so rapidly that Apple won’t be able to catch up with an in-house solution that makes Siri “the next AI gateway for consumers,” they wrote.

Other analysts have cited potential downsides to a Perplexity deal. Bank of America Securities noted that an acquisition could disrupt Apple’s existing partnership with Google. Moreover, a deal carries legal risk. Perplexity is entangled in a lawsuit with News Corp, the owner of Barron’s publisher Dow Jones, over claims of copyright infringement.

But Wedbush remains resolutely bullish. The firm likened Apple’s possible trajectory to that of Meta, which has embarked on an “AI warpath” to catch up with peers. The company’s efforts to attract talent and $14 billion Scale AI investment are “putting even more pressure on Apple to do something bold and developers need an AI platform…Perplexity is the answer.”

Wedbush maintains an Outperform rating and $270 target price on Apple shares. Wedbush Fund Advisers launched the Dan IVES Wedbush AI Revolution ETF last month, which includes Apple and the other Magnificent Seven tech stocks.

Apple was down 1% at $207.88 in trading Wednesday. Shares have declined 17% this year.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com