Apple (AAPL 0.67%) stock has been a solid performer on the stock market in 2023, with gains of 27% so far. Investment bank Goldman Sachs expects the technology giant to sustain its impressive rally and head higher thanks to a massive installed base of users, as well as the growth of its services business and innovation in new areas.
Goldman gave Apple stock its first buy rating in almost six years. The stock has jumped over 300% since the investment bank's previous buy rating, and analyst Michael Ng, who is now covering the company, has a $199 price target on Apple. That points toward 25% upside from current levels. Ng believes that Apple's solid brand equity has helped the company build a huge user base, which would play a key role in driving growth in the company's high-margin services business.
Given that Apple could reportedly be taking steps to boost its installed base further, it won't be surprising to see this tech stock surpass Goldman's price target and head higher in the long run. Let's look at one such potential catalyst that could send Apple stock higher in the long run.
Apple can snatch more users from the Android ecosystem
Supply chain rumors suggest that Apple could reportedly update the budget-friendly iPhone SE next year. According to noted Apple analyst Ming-Chi Kuo, Apple may use the iPhone 14's form factor for the next iPhone SE and may even give the device an organic light-emitting diode (OLED) display instead of the legacy liquid-crystal display (LCD).
Apple released the current generation iPhone SE last year, equipping the device with 5G wireless capability and a 4.7-inch LCD screen. The device was launched at an opportune time, given rising inflation and macroeconomic uncertainties, which explains why the iPhone SE turned out to be a popular smartphone in 2022. According to Counterpoint Research, the iPhone SE ranked ninth on the list of 10 best-selling smartphones globally last year.
The research firm estimates that the device captured 1.1% of global smartphone volumes in 2022. As an estimated 1.2 billion smartphones were shipped last year, the iPhone SE should have sold at least 13 million units, per Counterpoint. That would translate into just under 6% of Apple's overall shipments of 226 million units last year.
The next iteration of this device could be more successful, given the updates that Apple is likely to bring in the form of a bigger screen and better display. These updates should help the company capitalize on the trend of users switching from Android devices to iPhones.
On Apple's February earnings conference call, CFO Luca Maestri pointed out that the company saw "record levels of switchers in India and in Mexico." CEO Tim Cook also acknowledged the role played by switchers from Android to iOS in helping Apple hit an installed base of 2 billion devices. Apple ended 2022 with an 18.8% share of the global smartphone market, an increase of 1.5 percentage points over the prior year.
Given that the rumored 2024 iPhone SE is expected to be priced around $500, Apple could continue to win over more customers from the Android ecosystem. That's because midrange Android smartphones are priced between $450 to $650, and the potential pricing of the next iPhone SE could be below the $608 average selling price (ASP) of 5G smartphones seen last year.
All this indicates that Apple's installed base of iPhones could keep heading higher in the future. This should pave the way for stronger growth in the company's services business, apart from creating a new pool of customers that could upgrade to more expensive iPhones or even purchase other products in the long run.
A better entry-level iPhone could be a boon in the long run
An estimated 910 million 5G smartphones were shipped in 2022, according to CCS Insights. That number is expected to jump to 1.39 billion units by 2025. At the same time, the ASP of 5G smartphones is expected to shrink and drop to $444 by 2026.
So Apple would be doing the right thing by giving regular updates to its entry-level smartphone in the coming years, as it could play an important role in helping the company maintain its dominance in the 5G smartphone space. After all, midtier smartphones command just over a third of overall smartphone shipments globally.
Apple controlled just over 29% of the 5G smartphone market a year ago. Having a solid midrange smartphone in its lineup will help Apple maintain its grip over the 5G smartphone market in the long run, especially considering the way this space is expected to grow.
If Apple continues to hold even a quarter of the 5G smartphone market in 2025, its annual iPhone shipments could hit almost 350 million units (based on CCS Insights' 1.39 billion units shipment estimate). That would be a big improvement over last year's shipment of 226 million units. The iPhone generated just under $200 billion in revenue in 2022, which means the ASP of each unit was just over $883.
If Apple's iPhone ASP declines even by 10% after three years to $795 amid growing competition, the company could generate $278 billion in iPhone revenue in 2025 if it does manage to move 350 million units during the year (based on the assumption made in the previous paragraph). That would be an improvement of 39% over Apple's 2022 iPhone revenue.
Given that the iPhone is Apple's biggest source of revenue and produced 56% of its top line last quarter, a healthy bump in iPhone sales and the related increase in demand for its services business would give the company's top and bottom lines a boost in the long run. This is why savvy investors should consider buying this tech stock before it is too late.
