Is Apple Stock a Buy on Its AI Partnership with China’s Alibaba?

Apple (AAPL) has been in the spotlight amid reports of a strategic partnership with Alibaba Group (BABA), and today the news has been confirmed. “[Apple] talked to a number of companies in China, and in the end, they chose to do business with us,” said Alibaba Chairman Joe Tsai at an event in Dubai, adding: “They want to use our AI to power their phones.”

The deal for BABA to bring its artificial intelligence (AI) platform to Apple’s iPhones in the mainland marks a significant effort to enhance AAPL’s competitive position in China's smartphone market. This collaboration comes at a crucial time, as Apple faces declining market share in China, having dropped to third place with 15% market share following a steep 25% plunge in iPhone sales during Q4 2024. 

Investors seem optimistic about the prospects for an AAPL-BABA partnership, which propelled Alibaba's Hong Kong-listed shares to a three-year high prior to today’s 1.5% pullback. AAPL is relatively flat today, with the shares losing some steam after a two-day, 4% rally that placed the stock on course for a test of its overhead 50-day moving average, near the $240 level.

More broadly, Apple could face additional headwinds as Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) continues to reduce its holdings, having decreased from 900 million shares in Q3 2023 to 300 million shares by Q3 2024, with potential further reductions to be revealed in the upcoming Feb. 14, 2025 filing for Q4. The company's financial performance has remained relatively stagnant since 2022, and recent quarterly results show declining iPhone sales despite new AI initiatives.

Adding to these challenges, the implementation of new Trump administration tariffs, including a 25% levy on Canadian goods and 10% on Chinese products, has created market uncertainty and potential margin pressure. UBS analysts project a possible 100 basis point reduction in gross margins and a 3% cut in annual earnings per share from iPhone sales alone due to these tariffs. 

Despite these immediate challenges, Apple's long-term outperformance is impressive. While current market conditions and competitive pressures suggest a potentially challenging period ahead for the tech giant, analysts remain largely aligned in AAPL’s corner, with a consensus rating of “Moderate Buy.”