Will An AI iPhone Launch A New Refresh Cycle For Apple’s Smartphone?

In an earlier column this week, I wrote about the launch of the AI PC by Microsoft, Qualcomm, and their PC partners. One of the core objectives is to create new excitement about PCs, and they hope this will cause a considerable refresh cycle.

There is an interesting parallel development in the smartphone market that, in a sense, will use AI to push a potential super refresh cycle in smartphones, like the PC world is adding AI to PCs for the same reason.

For many, the PC has become a mainstream digital tool and is less exciting now. However, the AI PC is about to reenergize the PC market, and as competition heats up from Intel and AMD, the PC market will become interesting again.

Next week, at the Worldwide Developers Conference 2024, Apple is expected to launch its AI initiatives, which, if rumors are correct, will be for the Mac OS and the iPhone with a major part of its iOS 18 upgrade.

Depending on how Apple integrates AI into the Mac and iPhone and, more importantly, how it taps into its rumored partnership with OpenAI to deliver generative AI integration to its smartphone, it will most likely determine if Apple is about to launch a significant refresh cycle for its iPhone customers.

Bank of America’s Securities Senior Equity Research Analyst, Wamsi Mohan, shared his view on a possible iPhone refresh cycle in his recent note to their customers, as reported by Philip Elmer-Dewitt’s Apple 3.0 newsletter. (By the way, he has rebranded these AI-powered phones as “IntelliPhones,” an interesting moniker that may or may not stick.)

“IntelliPhones” the AI-enabled upgrade is coming. We view the upcoming AI-enabled phones (IntelliPhones) as driving a multi-year upgrade cycle similar to the step function improvement driven by the introduction of smartphones. We expect the adoption curve of AI phones to be faster than the adoption of smartphones and 5G. With an installed base of over four billion smartphones, we see the opportunity for the next upgrade cycle to be a once-in-a-decade type of event. While we do not expect all these features at WWDC, we do expect a pathway for the IntelliPhones to become mainstream, especially as conversational AI gets more integrated into daily use along with the backend of AI agents. Maintain Buy on a multi-year upgrade cycle, gross margin upside, and secular services growth.”

Although his advisory note speaks to the broader smartphone market, he also focused his remarks on Apple and maintained his buy rating of a $230 price target for Apple, which currently sits at $195 per share.

However, his commentary and other analysts suggest that adding AI to smartphones will make them exciting again, just as the PC industry believes that adding AI to PCs will drive new demand for the personal computer.

This AI empowerment will be fascinating to watch as the PC and smartphones hope that AI will reenergize their markets for both computing platforms at a time when growth has seemed stalled for the last 2-3 years.

As I pointed out in my earlier column this week, “while early adopters will jump on board quickly, it will take years, especially for enterprises, to refresh their millions of existing PCs to fully take advantage of Microsoft’s new Copilot software, which requires the NPU chips to operate.”

On the other hand, when Apple introduces new iPhones, their premium models tend to be bought in higher numbers by all levels of users, and adding an AI boost to the iPhone could drive a refresh cycle faster than it may happen with AI PCs. While I see Apple selling more new AI-based iPhones this fall, these more innovative phones will likely gain greater demand in 2025 as Apple measures out new AI features as they become available in newer versions of iOS.