The new iPhone that Apple will show off next week will be the company’s most important ever. At least since the one a year ago. And until whatever comes out next year.
That is the reality for a company with a $3 trillion-plus market cap that depends on a singular product line for more than half of its business. Apple has made some worthy efforts over the past several years to whittle away that dependence—services, Apple Watch and AirPods have all helped. But a segment that sells more than 200 million phones in an off year at average prices now nearing $1,000 each casts a very large shadow. The iPhone business on its own would rank as the 15th-largest company on the S&P 500 based on revenue for the 12-month period ended June—larger than Chevron, Ford or General Motors, according to data from S&P Global Market Intelligence.
A business that size doesn’t put up big growth numbers easily—especially in a mature market such as smartphones. But the iPhone has still been in a notable slump of late, with revenue falling 2% in Apple’s fiscal year that ended last September and another slight decline expected for the current year, according to estimates from FactSet.
Hence, there are high hopes the new phones can spark some new action—especially since they will be the first to incorporate Apple’s new artificial-intelligence technology. Apple’s stock price has surged around 25% over the past six months, well outperforming its megacap tech peers in that time. The stock closed Wednesday about 6% below its record high from July but still fetches nearly 31 times forward earnings—18% above its five-year average and a 48% premium to the S&P 500’s multiple, according to FactSet data.
That sets up some risk, especially since Apple’s shares often slip on the days its new iPhones are announced. This time, there is also the big unknown about whether on-device AI can actually help Apple sell more iPhones. Strong iPhone sales cycles in the past have typically coincided with hardware or design changes, such as bigger screens and 5G capabilities. And Apple’s new AI developments won’t be a big surprise either. The company already used its Worldwide Developer Conference in June to show off its Apple Intelligence offering.
Hence, expectations vary widely for what is expected to be the iPhone 16. “Apple Intelligence remains the key to unlocking pent-up iPhone demand and accelerating replacement cycle,” Erik Woodring of Morgan Stanley wrote in a note this past week. By contrast, David Vogt of UBS said in a report Wednesday that “we don’t view the AI related offerings as compelling enough in the near term to drive significant demand.”
Complicating the picture is that Apple Intelligence isn’t expected to launch until October, so the software won’t be included with the new phones likely going on sale later this month. And not all AI capabilities will be available initially; the integration of ChatGPT with Apple’s Siri digital assistant isn’t expected until late this year.
That has Wall Street expecting a more bifurcated sales cycle; analysts expect iPhone unit sales to rise 4.5% in Apple’s 2025 fiscal year which will be anchored by the new phones introduced next week, with a 5.4% gain projected in the following year, according to consensus estimates from Visible Alpha. “We believe that an ‘OK’ iPhone 16 (mid to high single digit revenue growth) and a stronger iPhone17 is increasingly embedded in expectations,” wrote Toni Sacconaghi of Bernstein in a report Tuesday.
Apple doesn’t necessarily need AI to see a decent iPhone cycle, since three consecutive years of weak unit sales growth indicates a large number of users are on older devices—and thus more primed for an upgrade.
But the stock’s recent run indicates investors still expect big things from Apple’s AI efforts. The iPhone maker has one advantage over its big tech peers. Its hardware-based business model hasn’t yet required a whopping increase in capital expenditures for data center-based AI components, such as Nvidia’s chips. Whether Apple can make money in AI without spending loads of it first remains to be seen.
Write to Dan Gallagher at dan.gallagher@wsj.com
