Citigroup: Despite the strong performance of the smartphone market, we still do not believe that the "AI upgrade cycle" will come this year

With the gradual landing of "Apple Smart" on the iPhone, a key term frequently mentioned in Wall Street investment bank reports on Apple is "AI upgrade cycle". Many major banks including Morgan Stanley and JP Morgan consider it as a key catalyst for iPhone to break out of its sales slump. At the same time, more and more smartphone brands have been introducing AI features this year, leading the industry to widely believe that 2024 will be the "AI smartphone era".

Although the current smartphone market is performing strongly, Citigroup points out that they do not believe the AI upgrade wave will arrive in the short term.

Citigroup analyst Christopher Danely stated in a recent research report:

Due to the lack of a clear "killer application", the AI-driven large-scale upgrade cycle will take at least another year to begin.

2024, The Strong Rise of AI Smartphones

More and more evidence indicates that the global smartphone market in 2024 is moving towards the goal of the "AI smartphone era":

The latest data from the International Data Corporation (IDC) shows that in the second quarter of 2024, smartphone shipments increased by 6.5% compared to the same period last year, reaching 285.4 million units. The second quarter seems more like a prelude to launching more AI smartphones in the second half of the year, which could become the next growth driver after 5G and foldable phones.

IDC also predicts that the global shipments of AI-powered smartphones are expected to reach 230 million units this year, a 3.6-fold increase year-on-year.

According to previous reports, due to confidence in "Apple Smart", Apple plans to ship at least 90 million units of the iPhone 16 in the second half of this year, a 10% increase from the previous generation's sales in the same period last year.

Last week, smartphone chip giant Qualcomm's financial report released more positive signals: revenue in the second quarter exceeded expectations with an 11% growth, with mobile chip revenue soaring from 1% in the previous quarter to 12% year-on-year.

Given the strong demand for AI smartphones, Citigroup has raised Qualcomm's revenue and EPS (earnings per share) forecasts for 2024 from $38.3 billion and $8.10 to $38.6 billion and $8.27 respectively.

Can "Apple Smart" Trigger an Upgrade Cycle?

Apple achieved its best June quarter performance in history, with Cook expressing great excitement about "Apple Smart". Some features will be launched gradually throughout the year, and it is expected that Siri will integrate ChatGPT functionality by the end of this year Tim Cook still sees "Apple Intelligence" as a major reason for iPhone users to upgrade, continuing to be confident in China's long-term development.

After the June Apple WWDC conference, the market is generally optimistic about Apple's future performance. Morgan Stanley, JP Morgan, and Bank of America previously believed that the gradual penetration of "Apple Intelligence" will drive a new round of growth in the supply chain.

JP Morgan previously stated that the AI ​​upgrade cycle is more likely to show a two-year "staggered climb" pattern rather than a one-year "super cycle." During these two years of the AI ​​upgrade cycle, Apple's sales focus in the first year will be in North America, with enough time to address issues in the European Union; it is expected that the focus in the second year will be on the European and Chinese markets.

This gradual growth pattern is based on several points:

First, North America will be the main contributing market in the first cycle, with North America alone meeting the sales expectations for the first year of the upgrade;

Secondly, the second upgrade cycle depends more on the European Union and China, which is crucial to ensuring that Apple's subsequent cycles are not affected;

In addition, Apple's intelligent features are not achieved overnight but are gradually rolled out: iPhone 15 Pro and 15 Pro Max users will delay their upgrade to the second year along with the iPhone 17.

JP Morgan also expects that in the AI ​​upgrade cycle, iPhone sales will increase by 22 million units in the first year and another 24 million units in the second year.

Citigroup is relatively positive about Apple in its report, believing that Apple has a strong financial position and a robust balance sheet, with a continuously expanding gross margin and an increasing proportion of service sales revenue. Citigroup has a target stock price of $210 for Apple, which is basically in line with Thursday's closing price, corresponding to a 30 times price-to-earnings ratio for the estimated earnings per share in the 2025 fiscal year