The first reports that Apple‘S (NASDAQ: AAPL) The latest crop of smartphones witnessed weaker demand than last year’s models recently weighed on the stock. But it seems like these reports don’t hold much water after all as the company’s iPhone 16 series seems to be getting a solid response from customers.
More importantly, a closer look at the potential sales prospects of the latest iPhone models suggests that Apple could witness a nice increase in sales in the future.
A major upgrade cycle could help Apple sell more iPhones
Counterpoint Research estimates that iPhone 16 models are witnessing robust demand in India, with sales reportedly up between 15% and 20% on the day the smartphones went on sale in the country. It’s worth noting that Apple’s sales in India are up a whopping 35% in fiscal 2024 (which ended in March this year), and the strong start that the company’s latest devices are off to in that market suggests that the momentum will continue.
In the meantime, T-Mobile CEO Mike Sievert also pointed out that the carrier is selling more iPhone 16 models this year than last year. While Sievert pointed out that the delayed rollout of Apple Intelligence could lead to a longer buying cycle, it’s worth noting that the iPhone maker could ultimately see strong sales due to an aging installed base of iPhones.
Dan Ives of Wedbush Securities estimates that of the 1.5 billion iPhones installed, 300 million have not been upgraded in four years. With generative artificial intelligence (AI) features set to make their way into the latest Apple iPhones, there’s a good chance that a significant portion of these older iPhones will be upgradeable. Considering 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 as the tech giant’s growth is set to improve thanks to the arrival of its AI-enabled smartphones. However, there’s another stock that stands to benefit big from the potential success of the iPhone 16, and investors can buy that company now at a lower valuation — Taiwanese semiconductor manufacturing (NYSE: TSM).
A bull’s-eye for TSMC thanks to the new iPhones
Taiwan Semiconductor Manufacturing, popularly known as TSMC, is the company that produces the processors that power Apple’s iPhones. The A18 and A18 Pro processors in the iPhone 16 models are manufactured using TSMC’s 3-nanometer (nm) process node.
Apple claims its iPhone Pro models can deliver 15% performance gains while consuming 20% less power than last year’s models. Meanwhile, the iPhone 16 and iPhone 16 Plus’ A18 chip is reportedly 30% faster and uses 35% less power than last year’s phones. The improved processing power and low consumption will play a key role in helping the new iPhones utilize Apple’s Intelligence suite of AI features and help the company tap into a fast-growing niche.
Apple reportedly started production of its latest iPhones in June this year and then ramped up production before launching them this month. This is one of the reasons why TSMC has witnessed a significant increase in revenues lately. The Taiwan-based foundry giant’s monthly sales rose 33% year-on-year in June, followed by a 45% increase in July and a 33% increase in August.
Apple is TSMC’s largest customer and reportedly accounted for a quarter of TSMC’s revenue in 2023. So it’s easy to see why TSMC’s revenue has been growing at impressive levels lately. Naturally, Nvidia is another key TSMC customer, as the semiconductor giant has tapped the latter’s foundries to manufacture its AI chips. However, Nvidia reportedly accounted for 11% of TSMC’s revenue last year, meaning Apple is moving the needle in a more significant way for the foundry giant.
Ives expects production of iPhone 16 models to reach 90 million units by 2024, an increase of 8 million to 10 million units over last year’s models. This estimated production increase from Apple appears to be contributing to TSMC’s impressive growth in recent months. More importantly, we previously saw that there is a huge number of installed users who could switch 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 growth.
In fact, reports suggest that Apple may have already purchased TSMC’s entire production capacity of 2nm chips for its 2025 iPhone lineup. It’s worth noting that Apple has done something similar in the past when it bought out TSMC’s entire 3nm production capacity for a year in 2023 so it could make enough iPhones.
All told, 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 the company’s revenue estimates for the next three years have risen significantly.
Furthermore, TSMC currently trades at 31 times current earnings and 21 times forward earnings. It is cheaper than Apple, which trades at 34 times current earnings and 30 times forward earnings. So TSMC stock offers investors a cheaper and more diversified way to benefit from the potential growth of iPhone sales, as well as the long-term growth of the AI chip market.
This is why investors should consider buying this semiconductor stock now before it can soar higher after the 75% gain it has already posted through 2024.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in 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 be a big hit, and here’s one more stock we need to buy before that happens, originally published by The Motley Fool
