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Analysts see Apple AI efforts boosting sales for a business you might not expect

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November 25, 2024

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Analysts see Apple AI efforts boosting sales for a business you might not expect

Wall Street analysts predict that iPhone users will buck up for artificial intelligence in more ways than one. The news Morgan Stanley said Monday that Apple’s services business could get a boost from customers willing to pay for artificial intelligence capabilities. That’s one of the major takeaways from the research firm’s annual Alphawise Smartphone Survey. The results showed that 78% of prospective buyers of AI-enabled iPhones would pay a monthly subscription to get unlimited access to Apple Intelligence features. The analysts gamed that out and forecasted a services revenue bump of $7 billion to $14 billion, or 5% to 11%, for fiscal year 2027. Another survey item that caught our attention was that 50% of current iPhone users who do not plan to upgrade within the next year cited the delayed rollout of Apple Intelligence as part of their decision. The Morgan Stanley analysts said that assuming Apple’s AI features are fully rolled out by fiscal 2026, “successfully converting this cohort of ‘would be’ iPhone upgraders would improve global iPhone upgrade rates by [roughly] 3 points or 10 points, implying 271M-313M FY26 iPhone shipments.” The new iPhone 16 models were released on Sept. 20, and the first AI software features weren’t available until Nov 19. As a result, Morgan Stanley analysts pointed to “pent-up upgrade demand” for the iPhone in the second half of fiscal 2025 or fiscal 2026. “Said differently, our 2024 Smartphone Survey results show (and therefore give us confidence) that broadening Apple Intelligence features and language distribution can accelerate iPhone replacement cycles/unit growth in [fiscal year 2026],” the analysts wrote. The survey also suggested that Apple’s China market continues to improve despite Wall Street’s ongoing concerns about increasing smartphone competition from domestic players like Huawei. “This year, it’s clear Apple’s competitive standing in China has improved,” the Morgan Stanley analysts said, pointing to higher iPhone retention and switching rates. “Both metrics for Huawei materially deteriorated [year-over-year.] … In our view, this sets iPhone up for growth when the China macro improves.” AAPL YTD mountain Apple (AAPL) year-to-date performance The analysts on Monday reiterated their buy-equivalent rating and top pick designation on Apple stock and their $273-per-share price target. Apple shares rose modestly Monday to $230 each. Currently, the Club has a 2 rating on Apple and a $250 price target . The stock has gained more than 19% year to date, lagging the S & P 500 ‘s more than 25% advance in 2024. To be sure, though, shares only need to gain less than 2.5% to top their record-high close of $236.48 each on Oct. 21. Big picture Some analysts struck a more cautious tone on Apple’s AI efforts and a forthcoming upgrade cycle. Melius Research said Monday that smartphone replacement cycles are “not panning out as quickly as expected,” in part, citing seemingly lackluster iPhone 16 sales . Similar to Morgan Stanley, the Melius analysts pointed to the delayed release of Apple Intelligence. “AI has been a disappointment so far in terms of features, it will likely take a while for companies to figure out which features consumers want/are willing to upgrade for,” the firm told clients. Wall Street, however, has been expecting an upgrade cycle for more than just iPhones. Other smartphone brands and personal computers are in the mix as well. That’s because many consumers bought new electronic devices in 2020 during the start of the Covid pandemic. Because replacement cycles on these items are typically 4 to 5 years, users should be looking to trade up with newer models. This cycle has a “few idiosyncrasies” that make it unique, Melius said. “Because individuals were working from home, they purchased better computers and newer phones than they would normally and are likely not feeling the need to upgrade yet.” The analysts added, “Further, the new slate of PCs and phones are not that exciting in terms of features or upgrades. Both of these factors are exacerbated by the current macroeconomic environment that is straining consumers.” Bottom line The Club has long argued that Apple’s AI integration will be a big catalyst for the stock. Jim Cramer said Monday that Apple’s high-margin services unit, in particular, will be a beneficiary. In response to Morgan Stanley’s call, he agreed that revenue streams for the business “could go up dramatically,” adding that “AI may be a hit for them.” The services business is especially attractive because the segment includes several subscriptions, which bring in more recurring revenue streams. Plus, quarter after quarter, the unit continues to grow. Revenue for the category hit a record high again during the September quarter at $25 billion. Similar to Morgan Stanley and Melius, we see Apple’s iPhone upgrade cycle as a story in the coming quarters, rather than right now. It’s part of the reason why the Club continues to maintain our “own it, don’t trade it” thesis on the stock. “The iPhone upgrade cycle will be elongated,” Jim said. “This has been my plan for why you have to stay with Apple. Don’t trade Apple.” With the delayed rollout of Apple Intelligence, it’s clear to us that users may take longer to switch up to newer models. But over time, we believe early adopters will tout the buzzy new features and persuade others to upgrade. It’s also great to hear that iPhone demand in China, Apple’s second-largest market, seems to be improving. Jim said the region has been a “gigantic headwind” for Apple. That’s because, in addition to stiffening smartphone competition, President-elect Donald Trump’s threats of China tariffs could weigh on device sales even more. Management has made several efforts to expand into emerging economies such as India to diversify manufacturing and sales. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An Apple store in Manhattan, New York, on July 5, 2024.

Nurphoto | Nurphoto | Getty Images

Wall Street analysts predict that iPhone users will buck up for artificial intelligence in more ways than one.

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