Apple Encounters Uncommon Underperformance Assessment from Financial Analyst on Wall Street, Raising Sell Considerations for Shares.
In an unexpected move, analysts at Jefferies have downgraded tech giant Apple (AAPL), slapping it with an "Underperform" rating equivalent to a sell. This is a rarity in the world of Wall Street analysts, who are typically known for their bullishness. Jefferies' price target for the stock now stands at $200.75, a significant drop from its previous target of $211.84.
The downgrade is based on several concerns that could impact Apple's performance and revenue growth. Chief among these is the expectation of weak iPhone sales, particularly for the upcoming iPhone 17 and 18 models. This is attributed to a slower uptake in artificial intelligence (AI) features, which are becoming increasingly important to consumers in their electronics purchases.
Apple's AI-driven features, such as Apple Intelligence, are not resonating with consumers as much as the company had hoped. A survey revealed that most U.S. consumers do not find AI features very useful, suggesting that there will not be an AI power upgrade cycle for the iPhone. This could result in Apple missing its revenue growth estimates when it reports its Q4 results at the end of January.
Jefferies also believes that there's a good possibility that Apple's guidance for Q1 could disappoint as well. The company's struggles in China, where iPhone sales plunged by 18% in Q4, are contributing to these concerns. Despite strong iPhone sales after the release of its latest version, Apple's AI is not approved in China and it must find a local AI partner to incorporate its technology to run Apple Intelligence.
These challenges, combined with concerns about Apple's valuation of 32x FY25 estimated earnings and a 15% premium to its discounted cash flow (DCF) estimates, have led to the downgrade. With the hope of an iPhone upgrade cycle diminishing and the stock seeing a lot of multiple expansion in the past six years, some profit-taking on the stock might be prudent.
Despite these challenges, it's important to note that Apple's business model remains strong. The company has seen stronger growth in its high-margin services revenue, including its App Store, Apple TV, Apple Pay, and other subscriptions and services. Its services gross margin is close to 74%, while its product gross margin is about 37%. With the services margin nearly double, revenue from services drops more easily to bottom-line profits.
The big question now is whether Apple can overcome these challenges and continue its growth trajectory. Only time will tell.
In light of these challenges, investors might want to reconsider their financing strategies when it comes to Apple's stocks. The downgrade and the mentioned concerns could impact the potential returns from investing in Apple. Jefferies' revised price target implies a potential decrease in the value of Apple stocks, which could impact one's portfolio's overall finance performance.