There's a large upgrade cycle to come for Apple's iPhone, says Morgan Stanley's Erik Woodring

All right. We are one week from Apple Earnings. Speaking of that company, questions lingering over iPhone 16 sales and investors await any insight into the crucial holiday quarter. Here with that setup into the print is Apple analyst Eric Woodring of Morgan Stanley. Welcome back. It's good to see you again. Thanks for having me, Scott. Well, what a great time to have you, too. Wow, there's been so much noise around iPhone numbers, the latest being that analyst out of China that, you know, people take his word as the gospel who says we're cutting by 10 million units. The stock went down on that report. Can you cut through this noise? What's the deal? Sure. So we're early in the iPhone cycle that always lends itself to a lot of noise. There's a lot of sell through data points. There's a lot of lead time data points. And we always have to remember, lead times are influenced by both supply and demand. And so being able to isolate either variable is tough, which makes lead times a bit of a an inconclusive indicator. Now, Ming-Chi Kuo is very highly regarded. He's been on the Apple beat for a number of years, especially on the supply chain. You know, when we published our preview Monday night, Tuesday morning, we said something similar. We cut our iPhone units in fiscal year 25, really the December and March quarters by about five million units. And what that takes into account is a slightly softer demand environment than maybe we originally foresaw. And really, that is a result of two major factors. One is the globe and the macro environment remains very challenging. Global demand, consumer demand is uneven. That is influencing iPhone sales amongst other things today. But the other factor really is the introduction of Apple intelligence or the delayed introduction of Apple intelligence. October 28th, we should get the first iOS 18.1 update, where we get the first Apple intelligence solution, so to speak. But really the core of what the consumer we think is going to look for doesn't come out until December of this year and then March of next year. And so the iPhone 16 family, as it stands today, looks fairly similar to the iPhone 15 of last year with a few incremental changes. We think that is being reflected in consumer demand today. So it's not a bad cycle. By all we know today, it is still very early in the cycle. But we did take some wind out of the sails because we do at least hear from the supply chain some indications of iPhone build cuts. Do you think we're looking at a six month chart, which which tells a pretty good story? It shows the ramp that's really happened since WWDC, when this stock got reignited because of all of the excitement about the potential of an upgrade cycle and not just a normal upgrade cycle, but a robust upgrade cycle because we haven't really had one in a minute. Should we question that stock's move as a result of what you've just told us, that there is at least some caution and delay around some of these features and the upgrade cycle itself? Sure, there's two ways to answer that question. First of all, you know, if we look back six months, this was a stock that was trading at one hundred and sixty five dollars. It was relatively, quote, cheap on a valuation basis, at least for Apple. And what we've seen this year in fiscal year twenty four is fundamentals have accelerated. Right. Last year, revenue declined three percent. It's growing two percent this year. Last year, EPS was flat. It's up 10 percent this year. Free cash flow is growing 14 percent this year. So at least this year, relative to last year, fundamentals have improved, albeit slightly, but still improved. But really, the move has been looking forward. Right. The market is a discounting mechanism of the future. And what we have heard and what we still believe is that there is a large upgrade cycle to come. We don't know the exact quarter it starts, but I feel very confident saying there are 700 million plus iPhones that exist out in the wild today that are three plus years old, meaning they have been fully paid off, that are not capable of running Apple intelligence. And our belief has been that this year was a bit of a moderate year of growth. We originally had two hundred and thirty five million iPhone shipments. We're now at two hundred and thirty one million iPhone shipments. But for fiscal twenty six with the iPhone 17, you not only get a more complete Apple intelligence portfolio that that the consumer can see, you also get a bit of a form factor change combined. We think those can draw that can drive something like eight dollars and seventy three cents of earnings power in fiscal twenty six. That is something to get excited about. So we think the market is ultimately discounting at least part of that. And what we think the next leg really becomes is, OK, let's refocus on the iPhone 17, not the iPhone 16. Historically, that happens about six to nine months ahead of an iPhone launch. So think end of year until March is maybe when you get that when the market starts to focus on the iPhone.