J.P.Morgan expect AI to power ‘significant acceleration’ of Apple’s iPhone replacement cycle

J.P. Morgan analyst Samik Chatterjee views Apple’s “presentation at WWDC to ‘tick all the boxes’ to convince investors that Apple is able to differentiate iPhone 16 (and future generations) with AI features relative to iPhone 15.” The analyst foresees a “significant acceleration” of the iPhone replacement cycle due to new AI features requiring the latest hardware.

Philip Elmer-DeWitt for Apple 3.0:
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From a note to J.P.Morgan clients that landed on my desktop Tuesday:

[T]he watchpoint for WWDC will be whether AI-assisted features are made available across a gamut of native apps, and whether the AI-assisted features will be available with iOS 18 in early September with the device launches, serving to highlight whether Apple has successfully caught up with the rest of the industry, despite a perceived delay in relation to investments in AI…

Drawing parallels from 5G where the consumer hardware upgrade cycle preceded the recognition of material experience improvements, the current base case remains for a significant acceleration of the replacement cycle within the ~1.5 bn installed base of iPhones. The current iPhone volumes run-rate of about 220 mn on an installed base suggests a replacement rate of 15% relative to the peak iPhone replacement of 20% around the 5G cycle. The same replacement rate of about 20% on the 1.5 bn installed base would imply a peak volume cycle of ~300 mn units. However, the key pushbacks in relation to the materiality of the upgrade cycle are: 1) the 5G upgrade cycle coincided with the pandemic and inflection in demand for devices, and 2) the 5G upgrade cycle for Apple coincided with tailwinds in relation to market share in China for Apple from restrictions on Huawei.

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MacDailyNews Take: If Apple can differentiate iPhone AI enough, or at least marketing “iPhone AI” effectively enough, the upgrade cycle will be goosed. Ditto for AI in the Mac, iPad, and Apple Watch. Requiring newer hardware to run AI feature, if the features are compelling, will sell more Macs, iPads, and Apple Watches, too. WWDC and its attached AI-focused marketing will tell the tale.

The pressure is on Apple’s marketing team to really hit one out of the park when it comes to this year’s AI announcements, making Apple look like an AI innovator. — MacDailyNews, May 20, 2024
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