Prediction: Apple’s iPhone 16 could become a runaway hit, and here’s 1 stock to buy Hand Over Fist before that happens

Initial reports that Applehis (AAPL 0.12%) The latest batch of smartphones witnessed weaker demand than last year’s models have affected the stock recently. But it looks like these reports might not hold much water after all, as the company’s iPhone 16 lineup seems to be getting a solid response from customers.

More importantly, a closer look at the potential sales prospects of the latest iPhone models indicates that Apple could see good sales growth going forward.

A big upgrade cycle could help Apple sell more iPhones

Counterpoint Research estimates that iPhone 16 models are witnessing strong demand in India, with sales increasing between 15% and 20% on the day the smartphones went on sale in that country. It’s worth noting that Apple’s sales in India grew by 35% in fiscal 2024 (which ended in March this year), and the strong start enjoyed by the company’s latest devices in that market suggests the momentum will continue .

Meanwhile, T-Mobile CEO Mike Sievert also pointed out that the carrier is selling more iPhone 16 models this year compared to last year. While Sievert pointed out that the delayed launch of Apple Intelligence could lead to a longer buying cycle, it’s worth noting that the iPhone maker could eventually enjoy strong sales due to an installed base of iPhones obsolete.

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, given that generative artificial intelligence (AI) features will be making their way to Apple’s latest iPhones, there’s a good chance that a significant portion of these older iPhones could be upgraded. With Apple selling just under 235 million iPhones last year, the stage seems set for a big jump in the company’s shipments going forward.

That’s why investors may want to buy Apple shares, given that the tech giant’s growth will improve thanks to the emergence of its AI-powered 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 — Taiwan Semiconductor Manufacturing (TSM -4.74%).

A shot in the arm for TSMC thanks to the new iPhones

Taiwan Semiconductor Manufacturing, known as TSMC, is the company that makes the processors that power Apple’s iPhones. The A18 and A18 Pro processors inside 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 A18 chip found on the iPhone 16 and iPhone 16 Plus is 30% faster and consumes 35% less power than last year’s phones. Improved processing power and reduced power consumption will play a key role in helping the new iPhones run Apple’s Intelligence suite of AI features and help the company tap into a fast-growing niche.

Apple reportedly started producing the latest iPhones in June this year and ramped up production thereafter before hitting the market this month. This is one of the reasons why TSMC has seen a significant increase in its revenue of late. The Taiwanese foundry giant’s monthly revenue rose 33% year-on-year in June, followed by a 45% increase in July and a 33% increase in August.

Apple is TSMC’s biggest customer and reportedly accounted for a quarter of the latter’s top line in 2023. So it’s easy to see why TSMC’s revenue has grown to impressive levels of late. Of course, Nvidia is another key TSMC customer, as the semiconductor giant has turned to the latter’s foundries to manufacture its AI chips. However, Nvidia accounted for 11% of TSMC’s revenue last year, which means Apple is moving 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, up 8 million to 10 million units from last year’s models. This expected increase in production 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 may move to Apple’s AI-enabled iPhones in the future. As a result, TSMC’s biggest customer could continue to play a central role in driving its growth.

Even better, reports suggest that Apple may have already acquired all of TSMC’s 2nm chip production capacity for its 2025 iPhone lineup. It’s worth noting that Apple has done something similar in the past, when it acquired all of TSMC’s 3nm production capacity for one year in 2023 so it can produce enough iPhones.

Overall, 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.

TSM Revenue Estimates for Current Fiscal Year Data by YCharts

Moreover, TSMC is trading at 31 times trailing earnings and 21 times forward earnings right now. That’s cheaper than Apple, which trades at 34 times trailing earnings and 30 times forward earnings. So TSMC stock offers investors a cheaper and more diversified way to capitalize on potential iPhone sales growth as well as the secular growth of the AI ​​chip market.

That’s why investors should consider buying this semiconductor stock right now before it can fly higher, following the 75% gains it’s already seen in 2024.