Apple (AAPL +0.17%) is the world's most valuable company, with a market capitalization of almost $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 not surprising to see Apple stock drop in price after TF International Securities analyst Ming-Chi Kuo pointed out that the demand for the company's latest iPhones is not as strong as expected.
Kuo estimates that pre-orders of Apple's latest iPhone 16 models are down nearly 13% year over year, with the first weekend's sales estimated to come in at 37 million units. Apple touted this latest model as a significant change over previous iPhones because it's the first to be artificial intelligence (AI)-enabled. But some doubters wonder if it was introduced too late. Samsung leads the generative AI smartphone market with a share of 36%, according to industry estimates, while Chinese manufacturers Xiaomi and Huawei control 22% and 13% share of this market, respectively.
NASDAQ: AAPL
Key Data Points
Kuo's report of lower pre-orders offers potential evidence that the doubters are right and it's a cause for concern. However, a closer look at the reasons behind the reportedly poor start of the iPhone 16 lineup indicates that investors shouldn't panic. It won't be surprising to see Apple's AI-enabled iPhones gradually gain sales momentum and help the stock deliver healthy gains over the next three years.
Apple investors need to be patient
The generative AI smartphone is in its early phases of growth, which is why investors shouldn't start panicking based on just one weekend of sales data of Apple's latest iPhones. According to market research firm IDC, shipments of generative AI smartphones are expected to hit 234 million units in 2024, an increase of a whopping 364% from last year.
Even then, generative AI smartphones are forecast to account for 19% of the global smartphone market this year, suggesting that their sales could keep growing at a tremendous pace in the coming years. IDC predicts that the generative AI smartphone market could clock a compound annual growth rate of 78% between 2024 and 2028, with shipments hitting 912 million units at the end of the forecast period. So it isn't too late for Apple yet to make a dent in the generative AI smartphone market and witness an acceleration in growth in the future.
Another reason why the new iPhones are likely to get off to a slow start is that they won't be running Apple Intelligence right out of the box. Apple's suite of generative AI features will be first made available in U.S. English by way of a software update next month. Other English-speaking countries such as the U.K., 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 get Apple Intelligence next year.
As such, it is not surprising to see why customers may not be rushing to purchase the latest iPhone models at launch. However, the long-term opportunity for the company within the generative AI smartphone market remains intact, especially considering a sizable installed base of users in an upgrade window.
According to Counterpoint Research, there are 50 million iPhone 12 models that are currently in an upgrade window in the U.S. alone. Meanwhile, analyst Dan Ives of Wedbush estimates that around 300 million iPhones have not been upgraded in over four years. So, Apple could be sitting on a massive upgrade cycle that could help drive sales of the iPhone 16 and subsequent AI-enabled models.
That's why investors would do well to look at the bigger picture instead of relying on one week of sales data. This is also the reason why analysts expect Apple's growth to accelerate over the next couple of fiscal years.
AAPL Revenue Estimates for Current Fiscal Year data by YCharts
Apple is expected to generate just over $390 billion in revenue in the current fiscal year, which would be an improvement of less than 2% from its top line in fiscal 2023. However, the estimate for fiscal 2025, which will begin next month, suggests that the company's revenue is on track to increase by almost 8%. The estimate for fiscal 2026 suggests that Apple is on track to maintain its revenue growth momentum.
Stronger earnings growth could send the stock higher over the next three years
The improvement in Apple's top line is set to filter down to its bottom line as well. The company reported $6.13 per share in earnings 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 set to improve over the next couple of years.
AAPL EPS Estimates for Current Fiscal Year data by YCharts
Assuming Apple's earnings indeed jump to $8.39 per share after three years, and it trades at 33 times earnings at that time (in line with its current earnings multiple), its stock price could hit $277. That 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-powered growth with a richer earnings multiple, especially considering that it is currently trading at a discount to the U.S. technology sector's average earnings multiple of 44.
So, Apple investors shouldn't miss the forest for the trees, as the generative AI smartphone has a lot of room for growth, and the company already has a huge installed base of users that should help it start capitalizing on this lucrative opportunity.
