Initial reports that Apple‘s (NASDAQ:AAPL) The latest batch of smartphones saw weaker demand than last year’s models and weighed on the stock recently. But it seems like those reports don’t have much substance after all, as the company’s iPhone 16 lineup seems to be receiving a solid response from customers.
More importantly, a closer look at the potential sales prospects of the latest iPhone models indicates that Apple could witness a good increase in sales in the future.
A big update cycle could help Apple sell more iPhones
Counterpoint Research estimates that iPhone 16 models are seeing strong demand in India, with sales reportedly increasing by 15% to 20% on the day the smartphones went on sale in that country. It’s worth noting that Apple’s sales in India rose an impressive 35% in fiscal 2024 (which ended in March this year), and the strong start the company’s latest devices are enjoying in that market suggests that the momentum will continue.
Meanwhile, T-Mobile CEO Mike Sievert also noted that the carrier is selling more iPhone 16 models this year compared to last year. Although Sievert noted that the delay in the launch of Apple Intelligence could lead to a longer purchasing cycle, it is worth noting that the iPhone maker could eventually enjoy strong sales due to an aging iPhone installed base.
Dan Ives of Wedbush Securities estimates that of an installed base of 1.5 billion iPhones, 300 million have not been updated in four years. So, with generative artificial intelligence (AI) features set to come to Apple’s latest iPhones, there’s a good chance that a significant portion of these older iPhones could be upgraded. Given that Apple sold just under 235 million iPhones last year, the stage seems set for a big jump in the company’s shipments in the future.
That’s why investors may want to buy Apple stock, considering that the tech giant’s growth will improve thanks to the arrival of its artificial intelligence-enabled smartphones. However, there is another stock that will benefit greatly from the potential success of the iPhone 16, and investors can buy that company at a cheaper valuation right now. Semiconductor manufacturing in Taiwan (NYSE: TSM).
A shot in the arm for TSMC thanks to the new iPhone
Taiwan Semiconductor Manufacturing, popularly known as TSMC, is the company that makes the processors that power Apple’s iPhones. The A18 and A18 Pro processors within the iPhone 16 models are manufactured using TSMC’s 3 nanometer (nm) process node.
Apple claims its iPhone Pro models can deliver a 15% performance boost and consume 20% less power than last year’s models. Meanwhile, the A18 chip found in the iPhone 16 and iPhone 16 Plus is 30% faster and consumes 35% less power than last year’s phones. Improved processing power and low power will play a key role in helping the new iPhones run Apple Intelligence’s AI feature set and help the company tap into a rapidly growing niche.
Apple reportedly began manufacturing its latest iPhones in June of this year and subsequently ramped up production before they hit the market this month. This is one of the reasons why TSMC has seen a significant increase in its revenue lately. The Taiwan-based foundry giant’s monthly revenue increased 33% year-over-year in June, followed by a 45% increase in July and a 33% increase in August.
Apple is TSMC’s largest customer, reportedly accounting for a quarter of the latter’s gross revenue in 2023. So it’s easy to see why TSMC’s revenue has been growing at impressive levels lately. Of course, NVIDIA is another key customer of TSMC, as the semiconductor giant has been tapping the latter’s foundries to manufacture its AI chips. However, Nvidia reportedly accounted for 11% of TSMC’s revenue last year, meaning Apple moves the needle in a more meaningful way for the foundry giant.
Ives expects production of iPhone 16 models to reach 90 million units in 2024, between 8 and 10 million units more than last year’s models. This estimated production increase by Apple appears to be contributing to TSMC’s impressive growth in recent months. More importantly, we saw earlier that there is a huge installed base of users who could migrate to Apple’s AI-enabled iPhones in the future. As a result, TSMC’s largest customer could continue to play a central role in driving its growth.
Even better, reports suggest that Apple may have already purchased all of TSMC’s 2nm chip manufacturing capacity for its 2025 iPhone lineup. It’s worth noting that Apple did something similar in the past when it purchased all of the capacity. TSMC’s 3nm manufacturing pipeline for a year in 2023 to be able to make enough iPhones.
Ultimately, TSMC’s growth prospects in the AI chip market thanks to customers like Nvidia, along with its close relationship with Apple, are the reasons why there has been a significant increase in the company’s revenue estimates for the next three years.
What’s more, TSMC trades at 31 times trailing earnings and 21 times forward earnings right now. It’s cheaper than Apple, which trades at 34 times trailing earnings and 30 times forward earnings. Therefore, TSMC stock gives investors a cheaper, more diversified way to capitalize on the potential growth of iPhone sales, as well as the secular growth of the AI chip market.
That’s why investors should consider buying these semiconductor stocks right now before they can rally further following the 75% gains it’s already posted in 2024.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
Prediction: Apple’s iPhone 16 Could Become a Big Hit, and Here’s a Stock to Buy Dip Before That Happens was originally published by The Motley Fool