What is the potential for Apple's AI replacement? Morgan Stanley: A "super cycle" is unlikely to happen in a year, closer to a two-year "step-by-step climb"

Despite the market's high expectations for Apple Inc.'s artificial intelligence system "Apple Intelligence," Apple's statement last Friday poured cold water on the EU market.

In the statement, Apple indicated that in order to find a solution that complies with EU regulatory requirements and protects consumer privacy, the release of the AI system in the EU region will be delayed. This has raised concerns in the market about the potential impact on Apple's AI upgrade cycle.

However, Morgan Stanley is confident in Apple's ability to respond. In a report released on the 24th, analyst Samik Chatterjee believes that this delay will not significantly affect sales in the EU region at present.

Because the AI upgrade cycle is more likely to follow 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, allowing sufficient time to address issues in the EU; it is expected that the focus will shift to the European and Chinese markets in the second year.

This gradual growth pattern is based on several factors:

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

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

In addition, the Apple Intelligence features are not all rolled out at once, but gradually introduced: iPhone 15 Pro and 15 Pro Max users will be delayed to upgrade alongside the iPhone 17 in the second year.

AI Gradual Penetration, Apple Faces Reevaluation of Upgrade Cycle

In the 5G cycle that erupted in 2020, Apple topped the global smartphone sales chart with its first 5G phone, the iPhone 12 series. Gartner's analysis of the quarterly data pointed out that many users purchased new phones to experience the 5G features.

Analysts point out that unlike the 5G super cycle, the AI upgrade cycle will be a two-year staggered growth, with one key factor being the Chinese market.

The Chinese market was the main driving force behind the explosion of the iPhone 5G cycle, but Morgan Stanley is reserved about China's contribution to this AI upgrade cycle. The reason is that the rise of local Chinese brands has taken away Apple's market share.

The AI-led upgrade cycle will be led by North America, followed by China.

In the report, Morgan Stanley also analyzed the contribution of different geographical markets to Apple's iPhone sales. The data shows that Western Europe (excluding the UK) accounts for only about 14% of Apple's total iPhone sales.

In comparison, North America, China, and the Asia-Pacific region are the main sales contributing markets. During the 5G upgrade cycle, iPhone sales increased from 190 million units in the 2020 fiscal year to 238 million units in the 2021 fiscal year. North America saw an increase of 110 million units, China increased by 18 million units, and the Asia-Pacific region increased by 9 million units. In contrast, the contributions from Western Europe and other regions were relatively small, with increases of 6 million units and 4 million units, respectively Analysis predicts that during 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.

JP Morgan emphasizes that although the North American market will play a major role in the first year, the Western European and Chinese markets are equally important for the second year of the upgrade cycle. The report suggests that in the second year of the AI upgrade cycle, Apple will rely more on international markets and will strive to limit delays in launching new features in these markets.

Following Apple's WWDC conference on June 11th, 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.

In the secondary market, Apple's stock price has risen by 18.15% over the past month, currently priced at $208.14 per share.