Demand for Apple’s latest smartphones appears to be strong, a good sign for one of its major suppliers.
Early reports that demand for Apple’s (AAPL 0.12%) latest smartphone is weaker than last year’s model has weighed on the stock price recently. However, the company’s iPhone 16 lineup seems to be getting a solid response from customers, so it seems these reports may not have much truth to them after all.
More importantly, a closer look at the potential sales outlook for the latest iPhone models shows that Apple could see a significant increase in sales going forward.
Massive upgrade cycle could boost Apple’s iPhone sales
Counterpoint Research estimates that demand for iPhone 16 models is strong in India, with sales jumping 15% to 20% on the day the smartphone was launched in the country. Notably, Apple’s sales in India grew by a whopping 35% in FY2024 (ending in March this year), with the company’s latest devices off to a strong start in the Indian market. The fact that it has fallen suggests that this momentum will continue.
Meanwhile, T-Mobile CEO Mike Siebert also pointed out that the company is selling more iPhone 16 models this year compared to last year. Siebert noted that delays in the rollout of Apple Intelligence could lead to longer purchasing cycles, but the iPhone maker could ultimately see strong sales as the iPhone’s installed base ages. It is worth noting that there is a possibility that it can be enjoyed.
Dan Ives of Wedbush Securities estimates that of the 1.5 billion iPhones installed, 300 million haven’t been upgraded in four years. As such, the latest Apple iPhones will come with generative artificial intelligence (AI) capabilities, and there’s a good chance that a significant portion of these older iPhones will be upgraded. Considering Apple sold just under 235 million iPhones last year, it seems poised for a significant increase in the company’s shipments in the coming years.
That’s why investors may want to buy Apple stock, considering the tech giant’s growth is expected to improve thanks to the arrival of AI-powered smartphones. But there’s another stock that stands to benefit greatly from the iPhone 16’s potential success, and investors can now buy the company at a cheaper valuation: Taiwan Semiconductor Manufacturing (TSM). 4.74%).
A blow to TSMC thanks to new iPhone
Taiwan Semiconductor Manufacturing Co., Ltd., commonly known as TSMC, is the company that manufactures the processors found in Apple’s iPhones. The A18 and A18 Pro processors in iPhone 16 models are manufactured using TSMC’s 3-nanometer (nm) process node.
Apple claims its iPhone Pro models can improve performance by 15% while using 20% less power than last year’s models. Meanwhile, the A18 chip found in the iPhone 16 and iPhone 16 Plus is reportedly 30% faster and uses 35% less power than last year’s phones. Improved processing power and lower power consumption will play a key role in helping the new iPhone run the Apple Intelligence suite of AI features and help the company carve out a rapidly growing niche market.
Apple reportedly began manufacturing the latest iPhones in June this year and has since ramped up production before launching them on the market this month. This is one of the reasons why TSMC has been witnessing a significant increase in revenue recently. The Taiwan-based foundry giant’s monthly revenue rose 33% year-on-year in June, followed by a 45% increase in July and 33% in August.
Apple is TSMC’s largest customer, reportedly accounting for a quarter of the company’s revenue in 2023. So it’s easy to see why TSMC’s earnings have been growing at impressive levels recently. Of course, NVIDIA is also one of TSMC’s key customers, as the semiconductor giant relies on the latter’s foundry to make AI chips. However, Nvidia reportedly accounted for 11% of TSMC’s revenue last year, meaning Apple has pivoted to become more important to the foundry giant.
Ives expects production of iPhone 16 models to reach 90 million units in 2024, an increase of 8 million to 10 million units over last year’s model. This increase in estimated production by Apple appears to be contributing to TSMC’s impressive growth in recent months. More importantly, we previously confirmed that there is a huge installed base of users who may migrate to Apple’s AI-enabled iPhones in the future. As a result, TSMC’s largest customer is likely to continue to play a central role in driving TSMC’s 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 acquired all of TSMC’s 3nm manufacturing capacity for a year in 2023 in order to make enough iPhones.
Overall, TSMC’s growth prospects in the AI chip market with customers like Nvidia and its close relationship with Apple are the reason for the company’s significantly higher revenue forecast for the next three years.
TSM earnings forecast data for current year by YCharts
Additionally, TSMC currently trades at a trailing P/E of 31x and a forward P/E of 21x. Its price-to-earnings ratio is lower than Apple, which trades at a trailing P/E of 34x and a forward P/E of 30x. As such, TSMC stock offers investors a cheaper and more diverse way to take advantage of potential growth in iPhone sales and the long-term growth of the AI chip market.
That’s why investors should consider buying now before this semiconductor stock climbs on top of the 75% rally it’s already recorded in 2024.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
