According to a Bloomberg report, Apple executives internally discussed acquiring artificial intelligence (AI) startup Perplexity. The reports come at a time when Apple stock has been underperforming its tech peers amid concerns that it has slackened on its efforts in AI.

The discussions are reportedly at an early stage, and so far, Apple hasn’t made a bid to Perplexity’s management. While Apple did not respond to Reuters’s request for a comment, Perplexity said, “We have no knowledge of any current or future M&A discussions involving Perplexity.”

Perplexity, known for its conversational AI search tools that provide summarized information from the web, recently closed a funding round valuing it at $14 billion. An acquisition at this price would be Apple’s largest ever, surpassing its $3 billion purchase of Beats in 2014.

Apple is Looking to Bolster Its AI Capabilities

The deal might help Apple bolster its AI capabilities at a time when the perception of it lagging behind other tech companies is gaining traction, particularly after the recent Worldwide Developers Conference (WWDC).

Apple is reportedly seeking to enhance its capabilities in AI-driven search and potentially reduce its reliance on Google’s search engine, which currently generates an estimated $20 billion annually for default placement in Safari. The ongoing U.S. antitrust lawsuit against Google’s search dominance could be another motivation behind Apple’s consideration of acquiring Perplexity.

Would Perplexity Be a Cultural and Strategic Fit for Apple?

Meanwhile, while there is no certainty about whether Apple would make an offer for Perplexity, there is a question mark over the cultural fit between the two companies. Apple has cultivated a strong reputation for its privacy policies and features, often positioning itself as a privacy-first company. This stance is backed by several key principles and functionalities, including in AI, where it laid a great deal of emphasis on privacy even as it arguably led to fewer features in its flagship Apple Intelligence as compared to what other competitors are offering.

In contrast, Perplexity has made no pretension about putting similar emphasis on privacy. Peaking on the TBPN podcast in April, Perplexity CEO Aravind Srinivas said that one of the reasons Perplexity is building its own browser is that it would give it the ability to collect more data about its users, including their activities outside its app. Srinivas said that this would enable the company to sell premium ads.

According to Srinivas, “some of the prompts that people do in these AIs is purely work-related. It’s not like that’s personal.” He added, “On the other hand, what are the things you’re buying; which hotels are you going [to]; which restaurants are you going to; what are you spending time browsing, tells us so much more about you.”

“We plan to use all the context to build a better user profile and, maybe you know, through our discover feed we could show some ads there,” explained Srinivas while stressing that users would be comfortable with these ads as they would be more relevant to them.

AAPL is Facing a Class Action Lawsuit Over AI

Meanwhile, Apple is currently facing a shareholder class action lawsuit that alleges that the iPhone maker overhyped its progress in AI and misled investors about the timeline for integrating advanced AI features into its Siri assistant.

Shareholders argue that at its June 2024 Worldwide Developers Conference (WWDC), Apple led them to believe that AI, particularly “Apple Intelligence” features designed to enhance Siri, would be a key driver for iPhone 16 devices and would be ready for launch. However, the lawsuit claims Apple lacked a functional prototype of these AI-based Siri features and had no reasonable basis to believe they would be ready for the iPhone 16.

OpenAI’s Hardware Foray Could be a Challenge for Apple

In what could be a challenge to Apple, OpenAI is looking to foray into the hardware space with its $6.4 billion acquisition of io Products. The startup was founded last year only by Jony Ive, who is credited with designing several Apple products, including the iPhone.

In a post on X, Gene Munster of Deepwater Asset Management wrote, “Tech shifts like the internet, the smartphone, and AI only happen once in a generation. OpenAI is catalyzing this shift into something tangible.”

Ha added, “Before AI, there was no real threat to Apple’s or Google’s business. The emergence of AI, led by OpenAI, has created the first serious threat in 20 years.”

Notably, Apple hasn’t been able to come up with a product like the iPhone in years. The company did design the Vision Pro headsets, but the sales of the $3,500 gadget have been tepid at best.

Reports suggest that Apple might be working on AI-powered glasses that could have built-in speakers and microphones. However, it remains to be seen whether that product can be the next major computing platform and, importantly, fend off competition from Meta Platforms’ smart glasses as well as hardware products that OpenAI might launch.

AAPL’s Services Business Also Faces Headwinds

Separately, Apple’s Services business, which is the company’s most profitable segment, is also facing regulatory heat. A US federal judge ruled that Apple needs to allow competition in the App Store.

While Apple does not break down the revenues that it receives through the App Store fees, they are part of its hugely profitable Services business, whose gross margins are about twice that of the product business. The segment reported record revenues of $26.6 billion in the March quarter, which were up 12% YoY despite adverse currency movements. Notably, while in previous quarters, Apple used to provide some color on the segment’s revenue guidance, it refrained from doing so, citing “uncertainty from several quarters.”

All said, while reports of Apple considering buying Perplexity haven’t been confirmed by the iPhone maker, the clock is slowly ticking for the company as it strives to shed the perception that it is missing the AI bus even as tech peers race ahead.