Citi has projected that due to the delayed release of some AI features by Apple (AAPL, Financial), iPhone sales in the third and fourth quarters will fall short of market expectations by 2%-3%. Despite this setback, the complete rollout of AI functions in the coming spring is expected to spark a new wave of device upgrades.
Citi maintains its forecast for iPhone sales over the next two years: predicting a 2.6% decline in 2024 to 225 million units and a 9% increase in 2025 to 246 million units. The recently released iOS 18.1 update includes initial AI features, such as a writing tool for rewriting texts, photo cleanup, email summaries, and redesigned Siri text input, among others.
The release of these AI features marks a milestone for Apple, potentially boosting sales of the new iPhone 16 series and addressing Wall Street's inquiries about Apple's AI strategy. However, Citi emphasizes that the success of Apple's AI hinges on its ability to drive iPhone upgrade demand, a point of significant interest for investors.
The seasonal sales pattern of iPhones, traditionally peaking during specific times like holidays, might shift due to the delayed software release this year. Analysts suggest that although iPhone sales will be below expectations this year, the full AI rollout next spring will likely stimulate a significant upgrade cycle.
The iOS 18.1 update offers limited AI features, with the more comprehensive iOS 18.2 set to launch in December, including features like ChatGPT but excluding Siri actions and personal context, which will arrive next spring. The market also eagerly anticipates the iPhone SE 4, expected in spring 2025, possibly supporting Apple's AI and featuring a USB-C port, OLED display, and A18 chip.
While Citi has not projected specific sales figures for the SE 4, the first two generations of iPhone SE shipped around 24 million and 15-20 million units, respectively. Apple's services business continues robust growth, with App Store net revenue up 13% year-over-year in the September quarter, aligning with Apple's double-digit service growth expectations. Despite regulatory risks, Citi maintains a "buy" rating for Apple stock, with a target price of $255, approximately 9% above the current stock price.
Analysts believe Apple's expanding installed base and subscription growth will drive future demand, especially after the comprehensive launch of its smart software.
