Apple bets big on AI as analysts brace for ‘biggest upgrade cycle ever’
The tech titan wasn’t the first to market with personal computing or smartphones. But after sitting out the artificial intelligence boom for two years, does it still have its lustre?
Apple is on the “cusp of its largest device upgrade cycle ever” – Morgan Stanley analysts say – after it released its first phone that has been “built from the ground up” to capitalise on the artificial intelligence boom.
The $US3.4 trillion ($5.06 trillion) tech titan has largely sat out of the AI frenzy for the past two years as rivals appeared to leapfrog ahead. But Apple looks set to again do what it has done for years: while it’s not necessarily the first to market – there were other smartphones before the iPhone – it can make the technology its own and spark desirability.
That’s what consumers were eagerly awaiting to see if Apple could recapture at the It’s Glowtime event at its headquarters in Cupertino, California this week when it released its iPhone 16 range.
The devices look largely unchanged from last year’s 15 models, which failed to reinvigorate sales, that eased 1 per cent to $US39.3bn in the three months to June, continuing their slump.
External tweaks are subtle. There is a new camera control button that makes it easier to take a picture and access photography settings. But the biggest changes are on the inside, which start with a new A18 chip. The Pro version can perform 35 trillion operations a second -15 per cent faster than the previous model, while using 20 per cent less power.
In layman’s terms, this can extend video playback by a few hours. It also gives the iPhone enough firepower to run all that AI, and this is what analysts are expecting will be enough to prompt consumers to part with their cash and ignite a record upgrade cycle for Apple.
You see, the only other phones that can run Apple’s AI – dubbed Apple Intelligence – are the iPhone 15 Pro and Pro Max.
But what exactly do these AI features do and will they help make life easier?
Cut prices
First of all, Apple attempted to make the decision easier by cutting the price of iPhone 16 Pro by $50 compared with last year’s model, while its standard iPhone 16 is $100 cheaper.
This is important. Consumers have been holding onto their phones for longer, particularly after 2021’s bumper year when the iPhone 13 was released and sales soared more than 39 per cent to $US192bn. Cut the price and that gives people an extra nudge to upgrade.
There is also pent-up demand for AI. Morgan Stanley’s latest Alphawise survey results show that 60 per cent of consumers looking to upgrade their phones in the US – where iPhones account for half of all smartphones sold – say Apple Intelligence will spur on their decision to open their wallets.
“Apple is on the cusp of its largest device upgrade cycle ever, as the launch – and
limited backward compatibility – of Apple Intelligence, improves upgrade cycles/new user acquisition and accelerates replacement cycles, resulting in a record-breaking FY25/FY26 cycle that is under-appreciated by the market today,” said Morgan Stanley analyst Erik Woodring.
“With the iPhone 16 release, we think Apple is making a clearer and stronger case of Apple Intelligence that is focused on personal intelligence and could assist users daily with communication, relive memories, prioritise and focus, and get things done.”
What is Apple Intelligence?
In Cupertino, Apple highlighted four main use cases of how it believed Apple Intelligence would make consumers’ lives easier.
This includes – like other AI tools – being able to polish writing, making it easier to communicate. Apple senior vice-president of software engineering Craig Federighi said: “You’ll be able to rewrite hastily written notes into a polished dinner party invite” and “adjust the tone of that Slack message to your boss to sound a little more professional to your boss”.
“We’re deeply integrating them (writing tools) into iOS, making them accessible virtually everywhere you type,” Federighi said.
Other AI functions make it easier to find files such as photos; prioritise and focus, such as generate email summaries and notifications; and get things done, like being able to take a picture of a concert flyer and add it to your calendar or find more information about something by taking a photo of it – like Google Lens.
Federighi said Apple’s voice assistant Siri had also been redesigned.
“All throughout our day, we turn to iPhone to help us get things done, and a great way to accelerate everyday tasks is with Siri. Apple Intelligence marks the start of a new era for Siri and makes it more natural, more contextually relevant and more personal to you, with richer language understanding.”
This includes the ability for Siri to understand you even if you “stumble over your words”, Federighi said.
Like Morgan Stanley, Citi analyst Atif Malik was upbeat on Apple Intelligence’s ability to bolster sales.
“We think Apple is making a clearer and stronger case around Apple Intelligence that is focused on personal intelligence, and we remain positive on iPhone refresh next year with gradual rollout of the AI features across the globe,” said Mr Malik, who has a $US255 share price target for Apple versus its current price of $US222.77.
“Apple Intelligence will be available in Australian English in December. Apple will then introduce Apple Intelligence in Chinese, Japanese, Spanish and French in 2025, meaning that by this time next year, Apple Intelligence should be available to at least 70 per cent of the iPhone installed base,” Morgan Stanley said.
What about the hardware?
The new A18 Pro chip also makes photography, video and sound editing easier. The iPhone Pro and Pro Max have been upgraded with what Apple calls a 48MP “fusion camera” that is capable of shooting in 4K at 120 frames per second in Dolby Vision.
The new camera sensor can also read data two times faster, which Apple says “enables zero shutter lag” allowing for fast and unpredictable moving objects to be captured clearly. New photographic styles have also been added, which Apple says are more than just souped-up filters.
“Styles also have a deeper understanding of skin undertones, so users can personalise how they appear in photos. Unlike filters, which often use a one-size-fits-all approach by adding a colour to an entire scene, adjustments are applied to specific colours of a selected style,” Apple said.
“A wider set of styles offers more creative options for editing a photo’s aesthetic, and styles can be further personalised with an easy-to-use new control pad and intensity slider for simultaneous adjustments across tone and colour.
The Pro line-up also comes with four new studio-quality microphones, which can record in spatial audio. They also harness machine learning to be able to remove unwanted sounds, while changing the audio mix to make it appear like it was recorded in a studio.
What about the cost-of-living crisis?
Apple has a problem; the increased durability of its iPhones has meant they last longer and give people less of a reason to upgrade.
But Apple’s marketing vice-president Kaiann Drance said this also meant iPhones held their value for longer, which gave people the option to trade-in their devices for a credit.
In Australia, consumers can get up to a $1125 credit if they trade in an iPhone 15 Pro Max; while if they have an eight-year-old iPhone 7 Plus, they can get a $65 credit.
In his bull case, Erik Woodring from Morgan Stanley, said he expected phone replacement cycles to accelerate in FY25 as “AI iPhone drives mid-to-high teens revenue/EPS growth”.
“Stronger than expected iPhone 16 upgrade intentions plus mix shift to higher-end iPhones drives 20 per cent-plus year-on-year iPhone revenue growth. Total revenue reaches $US475bn in FY25, while EPS reaches $US8.08.
“Our bull case valuation implies a 35.5x P/E (price/earnings) multiple on FY26 estimates.”
Atif Malik from Citi said: “We believe a premium is warranted to reflect expanding gross margins, growing services sales mix, and strong balance sheet”.
But he warned that “weaker macroeconomic conditions or shifting consumer demand could cause greater-than-expected deceleration or contraction in the handset and smartphone markets”.
“This would negatively impact Apple’s prospects for growth, and the shares may fail to achieve our target price as a result,” he said.
Goldman Sachs analyst Michael Ng, however, said the market’s current focus on slower product revenue growth “masked the strength of the Apple ecosystem and associated revenue durability and visibility”.
“Apple’s installed base growth, secular growth in services, and new product innovation should more than offset cyclical headwinds to product revenue, such as a reduced iPhone unit demand due to a lengthening replacement cycle and reduced consumer demand for the PC and tablet category,” said Mr Ng, who has a buy rating and a $276 share price target for Apple.
The author travelled to Cupertino as a guest of Apple.
More Coverage
ASX 200 eyes new peak; Dow, S&P hit records
Macquarie's big US regulatory settlement. Super Retail reviewing second ex-staffer's claims in ongoing workplace lawsuit. Techs lead Wall Street's belated rate cut rally. Bank of England holds rates. Bank of Japan decision to come.
The biggest roadblock to buying a home has changed
High house prices are no longer the biggest barrier to home ownership, as buyers seek new ways to get a foot in the door.