How Apple's AI push could do more than just reignite iPhone sales

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A new note from Melius Research supports what Jim Cramer has been saying for a while now: Club holding Apple's integration of artificial intelligence into the iPhone should be a boon to investors. Shares of Apple are "gearing up for a run" higher in anticipation of the company's Worldwide Developer Conference (WWDC) in June, where management is expected to share more about its AI strategy, Melius analysts wrote to clients Monday. They say the event could be the "most important [WWDC] since the launch of the iPhone in 2007." That's because investors will finally get a sense of the tech behemoth's forthcoming AI-integrated offerings, which both Jim and Melius believe will lead to a much-needed upgrade cycle for the iPhone. "I think the iPhone next generation has to incorporate far more AI than it does now," Jim said on Monday. The Club's belief is that doing so will prompt iPhone users to upgrade to the newer model, helping reignite topline growth for Apple following a prolonged period of sluggishness. That view has helped us remain patient with the stock as investor concerns about its business in China contributed to a rocky start to 2024. Shares of Apple are up nearly 16% since their 2024 low close of $165 apiece on April 19. The recovery has brought the stock back to nearly flat on the year after being down more than 14%. Still, Apple is trailing the S & P 500 by a healthy margin, with the broad index up 11% year to date. The majority of Apple's installed base of more than 2.2 billion devices is iPhones, Melius said in its note Monday. As the company rolls out more AI features on its flagship device, "most of us will follow the Cupertino Collossus' lead," analysts contended. They added, "Don't forget, the iPhones bought in the Covid surge are turning 4 years old now and the base is about to get a big nudge." Melius is wisely emphasizing the importance of Apple's loyal customer base , which is at the heart of Jim's "own it, don't trade it" thesis on the stock. AAPL YTD mountain Apple (AAPL) year-to-date performance AI can boost more than just iPhone sales, according to Melius. Revenue growth for Apple's high-margin services segment, which includes offerings like iCloud storage, also is bound to accelerate, the firm said. AI will likely require more storage, so some customers may be compelled to upgrade their iCloud subscription plans to the larger, costlier options, the analysts wrote. "For example, if [100 million] more users were prompted to upgrade storage from the $2.99/month option to the $9.99 option, that could generate an incremental $8.4 [billion] in annual revenue and add an incremental $0.45 to annualized EPS," Melius said. Jim has long touted Apple's services business, arguing its recurring and profitable nature makes the company's stock worthy of a higher valuation. Even though AI announcements are around the corner, that doesn't mean that negative headlines around Apple will stop. On Monday, Reuters reported that Apple is offering big discounts on its iPhone 15 in China due to stiffening competition from local rivals like Huawei. Jim told members to "be careful about making a judgment on China based on any report because almost every report has been wrong," he said. "The desire to knockback Apple by everybody is extraordinary." China sales were much better than feared in the tech giant's most recent quarter despite sluggish economic growth and stiffening competition in the country. In the three months ended March 30, the iPhone 15 and iPhone 15 Pro Max held the No. 1 and 2 spots for top-selling smartphones in urban China, the company said, citing market research firm Kantar. The company also continues to diversify revenues by expanding operations in emerging markets like India , representing additional paths for growth. (Jim Cramer's Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. Citizens are walking past an Apple store in Shanghai, China, on May 15, 2024. Costfoto | Nurphoto | Getty Images