Apple Event Review: Will Apple Intelligence Spark the Next Upgrade Cycle?

The highly anticipated Apple Fall Event finally took place on September 9th, Eastern Time. During the event, Apple unveiled the new iPhone 16 series, Apple Watch Series 10, and AirPods 4. The highlight of the event was undoubtedly the introduction of the first-generation AI iPhone, the iPhone 16 series. With Apple's iPhone business experiencing a decline over the past two quarters, the question arises: can AI serve as the catalyst to reverse this trend?

The newly released iPhone 16 series is the first model to support Apple Intelligence. On the hardware front, the iPhone 16 series is equipped with the new A18 and A18 Pro chips, manufactured with the second-generation 3nm process. These chips boast performance improvements of 30% and 20% over the previous generation, respectively, enhancing their ability to support AI functionalities.

On the software side, Apple has integrated AI features across various product functions. Specifically:

(1) AI Camera Control Button: Apple has added a camera control button to the side of the iPhone. This button enables "visual intelligence," allowing the system to automatically extract detailed information about the photographed object. For instance, pointing the camera at a restaurant will display reviews, menus, and reservation information.

(2) Enhanced Siri Voice Assistant: In the new iPhone, Siri has become more natural, context-aware, and personalized. For example, Siri can extract information from user texts or send specified photos to designated users.

(3) Other AI Applications: These include AI-generated emails and texts, emoji creation, text-based searches of past photos and videos, automatic summarization of various emails and apps, and replacing original notifications with summaries.

Figure：Highlights of the New iPhone 16 Series

Source: Company Announcement

Can the AI iPhone trigger a new upgrade cycle? To answer this, we need to address two key questions:

Currently, global consumer interest in AI phones is low. According to Canalys market research data, only 7% of global consumers are "very inclined" to make a purchase decision based on AI. In Apple's third-largest market, Greater China, 43% of consumers are "very inclined" to buy a product because of AI, compared to just 15% in Apple's largest market, the United States. Therefore, consumer awareness of AI phones needs cultivation, and manufacturers must quickly capture consumer mindshare.

The rollout of AI features in the iPhone varies by region, affecting consumer upgrade cycles. Apple announced that the test version of Apple Intelligence will be available in U.S. English next month, with other localized English versions following in December. Versions in Chinese, French, Japanese, and Spanish will be released next year.

Figure: Apple Intelligence to Launch in Chinese, French, Japanese, and Spanish Versions Next Year

Source:Apple Website

As a result, U.S. consumers will be the first to experience Apple Intelligence, likely stimulating demand in the North American market. Other markets may wait for feedback from North American users before deciding to purchase the new iPhone, delaying the overall upgrade cycle. Additionally, consumers in Greater China will need to consider which AI model Apple will use in China. Reports indicate that Apple is considering models from Baidu and Alibaba, but this will be confirmed once AI features are launched in the Chinese market.

Overall, our view on Apple remains largely the same as before. Apple's current performance is facing growth bottlenecks and needs a new growth catalyst to break through. Following this event, it is expected that as Apple Intelligence gradually rolls out in global markets, the current upgrade cycle will "progressively" begin. It is anticipated that the company's performance will see further improvement in fiscal years 2025 and 2026. Benefiting from good cost control and cautious external investments, the company's profit margins remain stable. It is expected that the EPS growth rate for fiscal year 2024 will be in the high single digits, with a potential double-digit EPS growth rate in fiscal year 2025.

Shareholder returns are competitive, but valuations are high. The company spent $32.2 billion on buybacks and dividends this quarter, and it is expected to maintain this scale over the next three quarters. This results in an annualized shareholder return rate of approximately 3.8%, slightly above the U.S. risk-free rate of 3.72%, remaining competitive in a declining interest rate environment. Currently, the company's valuation stands at a Price-to-Earnings (P/E) ratio of around 34x (TTM), with a forward P/E for 2025 of approximately 30x, making the valuation reasonably high and relatively less attractive.

In summary, it is crucial to closely monitor the sales data of Apple's new products. For Apple’s stock price to see significant upward movement, substantial improvement in fundamentals is still required. For investors, we recommend the following investment strategies:

1. For Investors Holding the Stock: It is advised to adopt a covered call strategy, holding the stock while continuously selling high strike price call options and closely monitoring sales performance. If sales performance is good and the stock price continues to rise, the target price for selling calls can be adjusted upwards to achieve higher returns. If sales performance is poor and the stock price lacks upward momentum, investors can earn option premiums to hedge risks.

2. For Investors Not Holding the Stock: They can sell put options to lower the cost of entry, or wait for a lower valuation to buy in.

Additionally, if investors find options too risky but still want to amplify returns, they can consider buying leveraged ETFs focused on Apple. If investors believe the stock price will decline, they can buy inverse leveraged ETFs such as AAPD. Conversely, if they believe the stock price will rebound, they can buy bullish leveraged ETFs such as AAPB, AAPU, or AAPX.