Morgan Stanley Sets Expectations on Apple Stock Following New AI Updates

For the longest time, Apple (NASDAQ:AAPL) stock was an artificial intelligence embarrassment.

The company that brought us Siri, the Apple virtual assistant first installed on the iPhone 4 in 2011 – which began as a novelty and ended up as a joke – had given up its lead in AI to archrival Alphabet (NASDAQ:GOOGL), to OpenAI, and, of course, to Microsoft (NASDAQ:MSFT). By 2024, Apple’s shame had become complete, as media reports began circulating that Apple was making the rounds of AI companies, hat in hand, and looking for a deal to license someone else’s AI to integrate into its new iPhone 16.

Making lemonade out of lemons, however, Apple this week did its best to spin its AI embarrassment as good news, announcing at its 2024 World Wide Developer Conference that it finally has a product able to put artificial intelligence on its iPhones.

As Morgan Stanley analyst Erik Woodring explains, the new “Apple Intelligence” product will integrate OpenAI’s ChatGPT-4o large language model with Apple’s Siri virtual assistant. This will deliver new “command/control functionality,” position the company as offering “the most differentiated consumer digital agent,” and – perhaps most important of all – drive iPhone owners to upgrade their devices in order to not miss out on the chance to own an AI-enabled iPhone.

Woodring doesn’t think this news is quite world-shaking enough to justify a higher price target for Apple stock, sticking instead with his $216 price target. But he does admit Apple’s WWDC announcement was “slightly ahead of our expectations,” and he does think the news is good enough to justify maintaining his Overweight (i.e. Buy) rating on the stock. (To watch Woodring’s track record, click here)

Why does he think this?

Mainly, because Apple confirmed that in order to use Apple Intelligence on an iPhone (or other Apple device), the device must be equipped with at least an Apple A17 Pro or M1 chip. As Woodring explains, 80% of Apple Mac computers are so equipped, but only 52% of iPads in circulation, and just 5% of iPhones have the technical capability to support Apple Intelligence. With iPhone sales driving revenues and profits for Apple, this means there’s a real incentive for consumers to upgrade their iPhones in the next and future product cycles – and a real potential for the upgrade cycle to accelerate, and drive Apple’s profits higher.

Here’s what this means in dollars and cents: Woodring assumes Apple users are upgrading their devices roughly once every 4.8 years. Every 0.1 year that Apple can narrow that replacement cycle, though, adds about 5 million iPhone sales annually, and boosts Apple’s per-share earnings by about $0.10.

Simply put, the more often Apple can convince people to upgrade, the more money Apple makes. That’s the real import of putting AI on its phones: As an incentive to upgrade.

Woodring does note that initially, only English language-speakers (more than 30% of the iPhone installed base) will be able to use Apple Intelligence, limiting the upgrade incentive to these users at first. But with Apple planning to enable its AI to converse in other languages over time, the addressable market for this product, and for narrowing the upgrade cycle, could grow three times as large.

With this prospect in mind, he still thinks Apple stock is a buy.

And he’s not alone. Based on 22 Buy recommendations, 11 Holds, and just a single Sell, Apple stock has a Moderate Buy consensus rating. However, going by the $208.47 average price target, the shares will stay rangebound for the time being. (See AAPL stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.