Apple Intelligence: Connecting the Upgrade Cycle Dots

* Apple’s WWDC Keynote showcased Apple Intelligence, supports the expected AI-on-device upgrade cycle.

* Reactions are mixed, but we remain bullish on AAPL as well as QCOM and OLED.

* Apple Intelligence adoption will support our thesis for One-rated Marvell.

* We recently upped our AAPL and QCOM price targets, here’s what we’re watching now.

As most if not all of us know, Apple AAPL held its WWDC keynote address Monday afternoon, and based on the fade in the stock price, it’s fair to say the market’s initial reaction was one of being underwhelmed. While it’s true the updates Apple shared across its various software platforms were modest during the first half of the presentation and were less than compelling, the second half featured what folks were far more interested in hearing about – Apple putting its own stamp on artificial intelligence, which it did by naming its effort "Apple Intelligence."

In our view, Apple Intelligence has the potential to be one of the leading ways consumers utilize AI, in part because of the Apple install base, but also because of Apple’s focus on privacy. The key takeaway, however, was Apple Intelligence will only work with a handful of its newer models (see below). This supports our expectation for the coming AI-on-device upgrade cycle.

With an estimated 270 million iPhones that have not been upgraded in four years and the exclusion of more recent iPhone models, our thinking is we will see a multi-year upgrade cycle for the iPhone. Because Apple has been seeding Macs with M1 chips over the last several quarters, we think we will see an upgrade cycle emerge but not as robust as the one for iPhone. We have similar thoughts about the iPad upgrade cycle.

This confirmation keeps us bullish on Apple shares. We are seeing some mixed reactions across Wall Street, with uber-bullish Wedbush calling Monday event a home run. Bernstein views it more as “largely expected,” while Wells Fargo and others agree with expectations for the upgrade cycle. The event also managed to get DA Davidson to upgrade AAPL to "Buy" from "Neutral" and bump its price target to $230 from $200.

Last week we lifted our AAPL target to $230 from $200 following Taiwan Semi’s (TSM) monster May revenue number. As we move into the summer build season for the smartphone refresh cycle that tends to happen in the fall, we’ll continue to monitor comments from TSM, Foxconn, and others, updating our expectations and AAPL price target as needed.

The iPhone upgrade cycle also bodes extremely well for portfolio positions Qualcomm QCOM and Universal Display OLED. Last week we upped our QCOM target to $240 from $230 and reiterated our $225 target for OLED. Similar to our comments above for AAPL, as more data is had we will revisit our QCOM and OLED price targets as needed.

Connecting the dots when it comes to the explosion in data consumption and creation that Apple Intelligence will give rise to, our thinking is it will tighten existing network capacity and lead to another wave of capital spending. We see that driving an upswing in Marvell Technology's MRVL carrier infrastructure and enterprise networking business segments. Our price target on MRVL shares is $95.

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At the time of publication, TheStreet Pro Portoflio was long AAPL, QCOM, OLED and MRVL.