Apple acquiring Perplexity has both pros and cons: BofA

If Apple (NASDAQ:AAPL) were to acquire — or at least partner with — generative artificial intelligence search startup Perplexity AI, there would be several pros and cons to such a deal, Bank of America said.

“In our opinion, any such deal (we do not have any direct knowledge of the probability of such a deal) would likely be positive for shares that are currently in the penalty box given Apple is largely viewed as an AI laggard (deep Siri integration delayed and no cutting edge models),” Bank of America analyst Wamsi Mohan wrote in a note to clients. “Perplexity AI could address some of [the] key issues, including quick access to a voice assistant (better than Siri) and could be a hedge to the risk of having Google as a default search engine.”

Mohan, who has a Buy rating and $235 price target on Apple, said there would be many reasons for Apple to make a deal:

• it would provide the iPhone maker with access to a “high quality AI company” that has “state of the art” AI search and answering capabilities.
• access to talent and expertise in AI that it doesn’t already have.
• product synergies, as Perplexity could help improve Siri and aid Apple in monetizing hardware and services.
• stop a competitor from acquiring Perplexity.
• give it access to the search advertising market as an alternative to Google (GOOG) (GOOGL).
• and lastly, give Apple “strategic independence” on AI.

On the flip side, there are a number of negatives to such a deal, including:

• integration risk with the merger.
• talent retention risk.
• legal and regulatory risks.
• the impact to the Apple-Google relationship.
• the issue of how to resolve on-device versus on-cloud approaches.
• the success of consumer adoption.
• the deal does not solve Apple’s dependence on other large language models.

Nonetheless, if Apple were to indeed acquire Perplexity, it would likely drive multiple expansion, but could be a negative to earnings, as it could mean reduced Google traffic, Mohan conceded.

“In the [near-term], we think any positive developments around AI initiatives would be positive for the stock that has largely been seen as an AI laggard. A partnership could be a more balanced approach, but may not drive the same level of multiple expansion,” Mohan posited.