Morgan Stanley says AI makes Apple its top stock pick
We don’t know when all the features will ship and there will inevitably be challenges ahead for GenAI, but analysts of all stripes appear to be going nuts over Apple Intelligence. Loop Capital, BofA, Wedbush, and other analysts raising their price target on the stock – but this biggest hike comes from Morgan Stanley, which has raised Apple to the top stock pick.
Gonna go higher on AI, better than Dell
“Apple Intelligence is a clear catalyst to boost iPhone and iPad shipments, and our deep dive into the iPhone installed base, upgrade rates, and mix shift now points a record cycle ahead,” analyst Erick Woodring said. He now anticipates an EPS of $8.70 and ushers in a $273 target on the stock.
Morgan Stanley now predicts Apple will ship nearly 500 million iPhones across the next two years. (235m in FY25, 262m in FY26), which will equate to massive profits. That is 6% higher than the record FY21-FY22 cycle, resulting in nearly $485b of total revenue and $8.70 of earnings power by FY26 (vs. $459b and $8.20 previously).
“We believe Apple’s recent outperformance is sustainable. As a result, we are elevating Apple to our Top US IT Hardware pick (with DELL now our most-preferred enterprise hardware Overweight).”
Edge AI is the new opportunity space
The report is packed with estimates, but one really important element to Morgan Stanley’s findings is kind of buried at the end. The analysts believe that edge AI-related stocks will soon begin to grab growth away from pure GenAI plays, including many companies involved in the Apple supply chain – Hon Hai, LG Innotek, Sony, Genius, TDK, Luxshare, and more.
Key takeaways from within the Morgan Stanley report include:
- Apple Intelligence is set to drive record device upgrades; MS new forecast calls for 235m iPhone shipments in FY25 and 262m in FY26, 2-12% above Street.
- iPhone ASPs and iPads will also benefit. In totality, we now forecast 11% revenue CAGR in FY24-FY26, and $8.70 of EPS in FY26, supporting our $273 PT.
- The $273 PT assumes a 31x target multiple, 1 turn behind Apple’s prior peak, and implies a 2x PEG, in-line with the 10 year average.
- New bull case valuation is $349 (35x Bull Case FY26 EPS of $9.82) while bear case valuation is $173 (24x Bear Case FY26 of $7.10), implying a 2:1 R/R skew.
- Apple Intelligence is likely to catalyze broader outperformance of Edge AI beneficiaries; we identify 19 beneficiaries globally across US, EU and Asia coverage.
- Never in Apple’s 40 year history has the iPhone installed base been so large (1.3b+ devices), replacement cycles been so extended (at 4.8 years), and a new technology been limited to such a small cohort of users (8% of the iPhone/iPad installed base) all at the same time.
- While historically we’d contemplate 230-240m annual iPhone shipments in a strong cycle, these factors portend that annual shipments could reach 260-290m units, significantly higher than the 230-235m iPhone shipments the market is currently pricing in for each of the next 2 years.
- We estimate that by fiscal year 2024 end, nearly 700m iPhones will be 3 years or older (the “upgradeable base”), an all-time record and 10% larger than the prior FY23 peak.
- Of that base, one-third of potential upgraders are in North America, where Apple Intelligence will be available this fall, while two-third of potential upgraders are located internationally.
- The analysts forecast that in FY25 and FY26, 66-69% of iPhones shipped will be new models, 2-6 points above FY24 and 3 points above the prior (FY22) peak in FY26, resulting in 4-5% annual iPhone ASP growth each year.
Please follow me on Mastodon, or join me in the AppleHolic’s bar & grill and Apple Discussions groups on MeWe.
