Apple Is Considering Something It Hasn't Done in 15 Years. Here's What Investors Need to Know.

Apple (NASDAQ:AAPL) is reportedly considering a big move that could reshape the company. The Information reported on Wednesday that the iPhone maker was considering developing its own artificial intelligence server, which would be Apple's first activity in the enterprise server market since 2011.

The proposal would combine Apple's custom silicon with networking technology supplied by Nvidia (NASDAQ:NVDA) to develop AI servers that could be offered with either two or four M8 Ultra chips, which are Apple's top-performing processors, and geared specifically for AI inference.

Such a move, the first major action under new CEO John Ternus, would signal that Apple is ready to invest in AI architecture to use its custom-made chips in products beyond its consumer devices, which would be a significant shift in company strategy.

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Here's what we know about Apple's proposed servers

In its proposed partnership with Nvidia, Apple would use Nvidia's NVLink Fusion technology to connect its M8 Ultra chips to operate in its servers. NVLink is a high-speed chip-to-chip technology that allows graphics processing units (GPUs) to send data directly to one another. It includes specialized memory that works with custom AI chips to work with Nvidia data center systems.

Nvidia says its fourth-generation NVLink technology transmits data up to 900 gigabytes per second, which is 7 times the bandwidth of the connections used in conventional x86 servers. According to The Information's report, Apple staff believe that Nvidia's technology offers the best available technology, but Apple's proposed server could be developed without NVLink. Ternus, who was Apple's senior vice president of hardware engineering before becoming CEO this month, backed the initiative when it was suggested a year ago, the report said.

Apple hasn't been in the server hardware business since 2011, when it discontinued its Xserve line and shifted its resources toward standard hardware and consumer devices.

Apple's AI strategy to date has been focused on consumers and devices

In recent years, Apple faced a lot of criticism for not investing more in AI infrastructure. The other members of the Magnificent Seven grouping -- Microsoft, Tesla, Meta Platforms, Amazon, and Alphabet -- are all spending hundreds of billions on GPUs, CPUs, connectivity, memory, and data centers to develop their own cloud computing networks or specialized AI platforms. (The final member of the Magnificent Seven is Nvidia, which is the top AI chip supplier.)

Instead, Apple has been focused on embedding AI applications on its operating systems and devices through third-party technology. Its most recent operating system update includes Siri AI, which the company says is an improved version of its longtime digital personal assistant that is capable of a wider variety of tasks, including drafting emails and reviewing text messages. The new iPhone 18 series operates on a new 2-nanometer A20 Pro chip to handle AI workloads.

I think that Apple's strategy to date has been a winning formula. While its big tech peers are pouring billions into AI infrastructure, Apple has been able to avoid those massive capex expenses and remain a cash-generating machine. Revenue in the fiscal third quarter (ending June 27) was $109.41 billion, with net income of $29.78 billion.

Apple's free cash flow is a whopping $136.7 billion over the last 12 months and rising, which is better than even Nvidia's. Meanwhile, every other member of the Magnificent Seven, saddled with AI infrastructure capex, is seeing FCF fall.

AAPL Free Cash Flow data by YCharts

Apple certainly is in a strong financial position to develop an AI server business, if it chooses to. According to The Information's report, Apple's servers wouldn't be available until 2029, which is a long way off. But even if this intiative doesn’t get off the ground, we may be seeing the early stages of CEO John Ternus' new vision for Apple's business model.

Patrick Sanders has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.