Morgan Stanley Fund: Apple's smart debut, AI phone welcomes the super cycle?

On the morning of September 10th, Beijing time, the Apple Inc. autumn launch event, known as the "Tech Spring Festival", was held as scheduled, focusing on showcasing new products such as the new iPhone, Apple Watch, AirPods, etc. The iPhone 16, equipped with the latest 3nm A18 series chip, was the highlight of the event. Lei Zhiyong, Deputy Director of the Equity Investment Department of Morgan Stanley Fund, believes that in this AI terminal innovation cycle, apart from the growth in sales of terminals, there is expected to be a huge demand for inference computing power from the use of terminals, which is likely to further increase the demand for computing chips. At the same time, once terminals popularize AI, various software and model revenues may also truly reach widespread consumer and explosive levels. In terms of investment opportunities, he sees the pull of AI on cloud computing power and terminal consumer product demand. Apple Inc.'s smart debut, will AI phones usher in a super cycle? Compared to the Apple Intelligence (referred to as "Apple Inc. Smart") released at the WWDC conference in June by Apple Inc., this event did not see many software changes, mainly introducing two new standalone apps, including Writing Tools and Image Playground, a more intelligent Siri, and a cloud server Private Cloud Compute emphasizing user privacy protection. On the hardware side, the iPhone 16 series is equipped with a powerful A18 biochip, which can meet the computing power requirements of Apple Inc. Smart. Compared to the previous generation of chips, the A18's machine learning speed has doubled. Regarding the most anticipated launch time, Apple Inc. (AAPL.US) explicitly stated that the English version of Apple Inc. Smart will debut in the US next month and will gradually launch in countries like Australia, Canada, New Zealand, South Africa, and the UK starting from December; support for other languages such as Chinese, French, Japanese, etc. will have to wait until 2025. With the blessing of Apple Inc. Smart, the iPhone 16 is expected to unleash suppressed demand and accelerate the replacement cycle of iPhones. According to market estimates, the shipments of the iPhone 16 series in 2024 may reach 88-89 million units, by the end of 2024, the global Generative AI (GenAI) phone market is expected to grow by 344%, capturing an 18% market share. Data source: IDC Lei Zhiyong, Deputy Director of the Equity Investment Department at Morgan Stanley Fund, and Manager of Morgan Stanley Digital Economy Hybrid Fund, previously stated that AI phones are very similar to the 5G replacement trend, with a 1% replacement rate expected to push up Apple Inc.'s sales by 6% and increase Apple Inc.'s revenue by 1.8%. However, compared to the replacement trend, Lei Zhiyong believes that the significance of Apple Inc. Smart lies more in the potential for GenAI to penetrate consumer daily lives for the first time. Apple Inc. AI is expected to bring incremental revenue amounts to Apple Inc., with the possibility of 300-500 million users paying 10 yuan per month for AI by 2025, equivalent to nearly 5 billion yuan/month, and 1.5 billion existing users corresponding to 15 billion yuan/month, exceeding 100 billion yuan/year. What will be the next step for the AI industry? So how will this wave of Apple Inc. Smart-induced replacement cycles affect the AI industry that has been under pressure recently? Recently, US tech companies, especially those related to AI chips, have faced pressure. From the peak on July 11th, up to last Friday, September 6th, the Philadelphia Semiconductor Index accumulated a drop of over 23% (source: Wind). The successful convening of the Apple Inc. event injected some vitality into the technology sector, with the Philadelphia Semiconductor Index rebounding by 2.15% on the day of the event, and the Nasdaq Index closing up by 1.16% (source: Wind). In fact, compared to previous more "blurry" emerging concepts such as the metaverse, the tangible performance brought by the rapid development of AI in the past two years is visible to the naked eye. Taking a leading global AI chip company as an example, its data center revenue related to AI has been steadily increasing over the past two years, with the share of data centers in total revenue rising from less than 60% to 87.46% in the most recent quarter, all thanks to the growth brought by AI. Data source: Public report of a leading global AI chip company Therefore, despite short-term pressure, the overall trend of artificial intelligence has not changed. Lei Zhiyong believes that the evolution of artificial intelligence is phased, and there may be stages where progress may be below expectations, but that does not prove that artificial intelligence has failed. The future of artificial intelligence is vast, it is general artificial intelligence, not just about refining information on the internet in a question-and-answer format, it must be able to replace humans in some difficult environments or repetitive tasks and help complete these tasks. There is still a long way to go to achieve this goal. Lei Zhiyong also points out that although investment in AI is already hot, from the industrial perspective, artificial intelligence is still in its early stages. Specifically in terms of investment opportunities, Lei Zhiyong sees potential in the pull of AI on cloud computing power and terminal consumer product demand. He states that currently, both domestic and foreign tech giants are making efforts in cloud computing power and are also moving towards the application end, especially smart terminals. In the smart terminal industry chain, domestic companies can serve as supporting manufacturing industries with orders as performance realization support. In this AI terminal innovation cycle, apart from the growth in sales of terminals, he expects that the use of terminals will bring about a huge demand for inference computing power, which is likely to further increase the demand for computing chips. Furthermore, once terminals popularize AI, various software and model revenues may also truly reach widespread consumer and explosive levels.