Apple Inc. (NASDAQ: AAPL) saw its shares rise 2.5% to a record high on Monday, following Morgan Stanley's decision to raise its price target on the iPhone maker's stock and designate it as a "top pick." This move underscores the significant impact of Apple's recent advances in artificial intelligence (AI) on its stock performance.
Morgan Stanley analysts highlighted Apple's AI initiatives, particularly the introduction of Apple Intelligence, as key drivers for increased device sales. The new AI technology, unveiled last month, aims to compete with similar offerings from Alphabet Inc.'s Google and Microsoft-backed OpenAI. Apple Intelligence is expected to attract customers to upgrade their devices, despite being compatible with only 8% of current iPhone and iPad models.
"Apple Intelligence is a clear catalyst to boost iPhone and iPad shipments," the analysts noted, predicting that Apple could sell nearly 500 million iPhones over the next two years. This forecast represents a significant increase from Morgan Stanley's previous estimate of 230 million to 235 million iPhones annually over the same period.
In light of these projections, Morgan Stanley raised its price target for Apple's shares to $273 from $216. The stock, which has jumped nearly 20% this year, now has an average rating of "buy" with a median price target of $217, and has outperformed the S&P 500 index. Apple's shares climbed to $236.30, giving the company a market value of $3.62 trillion, the highest in the world.
The rise in Apple's stock comes ahead of the anticipated iPhone 16 launch and amidst industry expectations that Apple and Samsung will lead the global smartphone market recovery, driven by the excitement around GenAI-enabled smartphones. Apple sold 45.2 million smartphones globally in the three months ending June, up from 44.5 million a year earlier, though its market share fell slightly to 15.8%.
Morgan Stanley's upgrade is also based on the belief that the impending upgrade cycle for Apple devices will be more substantial than previously estimated. Analysts predict that Apple will ship nearly 500 million iPhones over the next two years, with 235 million units in fiscal year (FY) 2025 and 262 million in FY26. This represents a 6% increase from the record FY21-FY22 cycle and a 5% annual growth in iPhone average selling price (ASP).
The introduction of Apple Intelligence is expected to drive a positive mix shift and iPhone ASP growth, as users will need newer models like the iPhone 15 Pro/Pro Max to utilize the new technology. Currently, only 24% of iPads can run Apple Intelligence, suggesting a potential upgrade cycle for iPads as well.
Analysts forecast that in FY25 and FY26, 66-69% of iPhones shipped will be new models, leading to 4-5% annual iPhone ASP growth. For iPads, the introduction of Apple Intelligence could reduce replacement cycles to 3.8 years, the pre-COVID average from FY18-FY19.
Additionally, analysts believe Apple's outlook in China is set to improve. Over the past year, Apple lost market share in China's high-end smartphone segment due to stronger competition and sluggish iPhone demand. However, recent quarters have shown stabilization, and with the introduction of Apple Intelligence, Morgan Stanley analysts are optimistic about strong upgrades in that market.
Overall, Morgan Stanley's analysis suggests that while growth in iPhone units will account for 36% of Apple's total revenue growth through FY26, higher iPhone ASPs and iPad growth will contribute another 26% of total revenue growth.
