01:59 PM EDT, 03/22/2024 (MT Newswires) -- Apple's ( AAPL ) upcoming developer conference and an artificial intelligence-driven iPhone upgrade cycle could help improve investor sentiment amid concerns around China demand and the US Department of Justice's recent lawsuit against the technology giant, Morgan Stanley said.

The brokerage said it's mostly below Wall Street estimates for Apple's ( AAPL ) fiscal third-quarter results. Morgan Stanley projects earnings at $1.22 per share on revenue of nearly $80 billion, compared with the Street's $1.32 and $84 billion views, respectively. The firm pegs iPhone units at 39 million for the June quarter, below the 46 million modeled by the Street, according to the Friday note. Apple ( AAPL ) shares were up 0.8% during Friday's session.

This year, iPhone shipments are likely weaker than projected, nearly entirely due to China shipments slumping about 30%, which is leading to iPhone replacement cycles elongating to a record five years, Morgan Stanley said. However, there are several indications that Apple ( AAPL ) will come to market with new generative AI features beginning in June that could reignite iPhone growth in 2025, according to the note.

Morgan Stanley said there are signs that the company is investing heavily in AI both organically and inorganically. "Over time, we believe all of Apple's ( AAPL ) AI efforts will largely move in-house and on-device," the firm said.

The company has been testing an internal AI chatbot using its Ajax large language model framework, though there's potential for Apple ( AAPL ) to use an AI cloud-based external partner. Apple ( AAPL ) is reportedly considering Microsoft ( MSFT ) -backed OpenAI for a partnership, though Alphabet (GOOG, GOOGL) unit Google ( GOOG ) likely "makes the most sense given their historically strong relationship," according to the note.

The lawsuit, filed by the Justice Department and 16 state and district attorneys general on Thursday, accused Apple ( AAPL ) of "monopolization or attempted monopolization" of smartphone markets. In response, Apple ( AAPL ) said the suit was "wrong on the facts and the law" wrong on the facts and the law" and that it plans to defend itself against it.

"While we understand the logic behind the lawsuit, it's also very clear that Apple's ( AAPL ) competitive moat is a result of its seamless integration of hardware, software, and services, which creates a unmatched closed ecosystem of hardware and solutions offerings," Morgan Stanley said. The financial impact of the case is currently almost impossible to quantify, the brokerage wrote, adding that the suit will likely take "years before reaching a resolution," based on historical evidence.

On Thursday, Apple ( AAPL ) shares closed 4.1% lower, the steepest decliner on the Dow Jones Industrial Average and among the steepest on the S&P 500 and the Nasdaq Composite. Morgan Stanley reiterated its overweight rating and $220 price target on the stock.

"We acknowledge a reversal in negative (investor) sentiment won't happen overnight given lingering China demand concerns and the recently filed DOJ lawsuit," Morgan Stanley said. However, Apple's ( AAPL ) developer conference in June and a mid-September iPhone 16 launch could prove to be "important catalysts that can improve investor sentiment and reinvigorate the bull case, as compelling new AI features embedded into the iPhone 16 can catalyze an iPhone-upgrade cycle."

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