Where will Apple stock be in 3 years?

Apple (AAPL -0.29%) is the most valuable company in the world, with a market capitalization of nearly $3.3 trillion. The popularity of the company’s iPhones played a central role in helping the tech giant reach this position. So it was no surprise to see Apple’s share price drop after TF International Securities analyst Ming-Chi Kuo pointed out that demand for the company’s latest iPhones is not as strong as expected.

Kuo estimates pre-orders for Apple’s latest iPhone 16 models are down nearly 13 percent year-over-year, with first-weekend sales estimated at 37 million units. Apple touted this latest model as a significant change from previous iPhones, as it’s the first to have artificial intelligence (AI) enabled. But some skeptics wonder if it was introduced too late. Samsung leads the generative AI smartphone market with a 36% share, according to industry estimates, while Chinese manufacturers Xiaomi and Huawei control 22% and 13% of this market, respectively.

Kuo’s report of lower pre-orders offers potential evidence that the doubters are right, and it’s cause for concern. However, a closer look at the reasons behind the iPhone 16 lineup’s poor start indicates that investors should not panic. It won’t be surprising to see Apple’s AI-enabled iPhones gradually gain sales momentum and help the stock generate healthy gains over the next three years.

Apple investors should be patient

The generative AI smartphone is in its early stages of growth, which is why investors shouldn’t start panicking based on just one weekend of sales data for Apple’s latest iPhones. According to market research firm IDC, smartphone shipments with generative artificial intelligence will reach 234 million units in 2024, a 364% increase over last year.

Even then, generative AI smartphones are expected to account for 19% of the global smartphone market this year, suggesting that their sales could continue to grow at a tremendous pace in the coming years. IDC predicts that the generative AI smartphone market could see a CAGR of 78% between 2024 and 2028, with shipments reaching 912 million units by the end of the forecast period. So it’s not too late for Apple to make a dent in the generative AI smartphone market and witness accelerated growth in the future.

Another reason new iPhones might start slow is that they won’t run Apple Intelligence right out of the box. Apple’s suite of generative AI features will be available in US English for the first time via a software update next month. Other English-speaking countries such as the UK, Canada, Australia, New Zealand and South Africa will join the list in December, while other languages ​​such as French, Chinese, Spanish and Japanese are likely to receive Apple Intelligence this year future.

As such, it’s no surprise to see why customers aren’t rushing to buy the latest iPhone models upon release. However, the long-term opportunity for the company in the generative AI smartphone market remains intact, especially given a sizeable installed base of users in an upgrade window.

According to Counterpoint Research, there are 50 million iPhone 12 models currently in an upgrade window in the US alone. Meanwhile, Wedbush analyst Dan Ives estimates that about 300 million iPhones haven’t been updated in more than four years. So Apple could be in for a massive upgrade cycle that could help boost sales of the iPhone 16 and later models with AI.

That’s why investors would do well to look at the big picture instead of relying on a week’s worth of sales data. This is also why analysts expect Apple’s growth to accelerate over the next two fiscal years.

AAPL earnings estimates for current fiscal year data by YCharts

Apple is expected to generate just over $390 billion in the current fiscal year, which would represent a less than 2% improvement from the top line in fiscal 2023. However, the estimate for fiscal 2025, which starts next month, suggests the company’s revenue is on track to grow nearly 8%. The estimate for fiscal 2026 suggests that Apple is on track to maintain its revenue growth momentum.

Stronger earnings growth could push the stock higher over the next three years

Apple’s top line improvement is set to filter down to the bottom line as well. The company reported earnings of $6.13 per share in fiscal 2023, and the chart shows that its bottom line is on track to improve by 9% in fiscal 2024. However, the growth rate is slated to improve in the next two years.

AAPL EPS estimates for current fiscal year data by YCharts

Assuming Apple’s earnings do grow to $8.39 per share three years from now, and it trades at 33 times earnings at that point (in line with its current earnings multiple), its stock price could hit $277. This would be a 28% increase from current levels.

However, Apple stock could deliver stronger gains if the market decides to reward the company’s AI-fueled growth with a richer earnings multiple, especially given that it’s currently trading at a discount to its earnings multiple US tech sector average of 44.

So Apple investors shouldn’t miss the forest for the trees, as the generative AI smartphone has a lot of room to grow, and the company already has a huge installed base of users that should help it start capitalizing on this lucrative opportunity.