Citi comments on Apple AI: Ultimately, it depends on how much the upgrade cycle improves

After much anticipation, Apple released the iOS 18.1 mobile operating system update on Monday, allowing users who meet the device configuration requirements to experience the first batch of AI features.

These features include a writing tool integrated into applications for summarizing and rewriting text, image cleaning to remove objects in photos, summary of emails and notifications, redesigned Siri typing input, audio transcription in the Notes app, and smart replies for Messages.

Analysts believe that the release of the first batch of AI features is an important milestone for Apple, as it can boost sales of the iPhone 16 series released last month and address Wall Street's questions about Apple's artificial intelligence strategy.

However, Citigroup research suggests that the success of Apple's AI features will ultimately depend on boosting demand for iPhone upgrades, and investors should pay close attention to this.

On Monday local time, analysts including Atif Malik from Citigroup released a report stating that the release of Apple's AI features may disrupt the traditional seasonal sales pattern of iPhones. Typically, iPhones have distinct sales peaks in specific seasons (such as the holiday season), but this seasonal pattern may change this year due to delayed software releases.

Analysts believe that due to the delayed release of some AI features by Apple, iPhone sales in the third and fourth quarters of this year will be 2%-3% lower than market expectations. Nevertheless, once the AI features are fully launched next spring, a new wave of upgrades is expected.

Citigroup maintains its forecast for iPhone sales in the next two years: a year-on-year decrease of 2.6% to 225 million units in 2024, and a 9% year-on-year increase to 246 million units in 2025; iPhone 16 sales this year are expected to be 83 million units.

It is reported that the AI features provided in the iOS 18.1 system update are limited, and iOS 18.2 will be available in December, containing most of the AI features promised by Apple at WWDC, especially ChatGPT, but excluding Siri actions and personal context features, which will be launched next spring.

The report also mentioned market expectations for the iPhone SE 4, which is expected to be released in spring 2025, possibly supporting Apple's AI and equipped with a USB-C port, OLED display, and A18 chip. This indicates that Apple is expanding its product line to attract a wider range of consumers.

Regarding the sales of the SE 4, Citigroup did not make specific forecasts. For reference, the first two generations of the iPhone SE were released in 2020 and 2022, with shipments of approximately 24 to 20 million units in each respective year Citigroup believes that Apple's services business continues to show strong growth, with net revenue from the App Store increasing by 13% year-on-year in the September quarter, in line with Apple's expectations of double-digit growth in the services business.

Despite facing regulatory risks, Citigroup maintains a "buy" rating on Apple's stock with a target price of $255, representing a 9% premium over Apple's current stock price.

Analysts believe that Apple's growth in active installed base and subscriptions will help drive demand in the coming years, especially after the full rollout of Apple's intelligent software