Apple Inc. (NASDAQ: AAPL) is facing headwinds as Jefferies downgraded the tech giant's stock rating from "Buy" to "Hold," citing concerns over inflated market expectations for its upcoming iPhone models and the slow pace of its artificial intelligence (AI) advancements. The decision to downgrade comes at a critical time for Apple as it strives to maintain its dominant position in the highly competitive smartphone market while navigating new challenges in AI technology.
Jefferies analysts set a price target of $212.92 for Apple, reflecting a potential downside of about 6% from its last closing price. In response to the downgrade, Apple shares dipped 1.5% in premarket trading on Monday, highlighting investor unease about the company's near-term growth prospects. The downgrade is a significant move from the investment firm, which had previously been bullish on Apple's potential.
One of the central concerns raised by Jefferies is the market's overly optimistic expectations for Apple's iPhone 16 and 17 models. Analysts believe the projections of 5% to 10% unit growth for these models are unrealistic due to a lack of substantial new features and limited AI capabilities. They predict flat volume growth for the iPhone 16 in the second half of 2024, with only a modest 2.5% increase in lifecycle volume, dampening hopes for a robust upgrade cycle.
"The market's anticipation of accelerated smartphone replacement cycles driven by AI is premature," noted Jefferies analysts, emphasizing that AI-enabled smartphone technology is likely still a few years away from realizing its full potential. They pointed out that current limitations in high-speed memory and advanced packaging technology restrict the AI capabilities of existing smartphone models.
While Apple has announced plans to launch its AI platform, dubbed "Apple Intelligence," alongside its iOS 18.1 update later this month, Jefferies remains cautious about the timeline for these developments. Analysts argue that meaningful AI integration into iPhone hardware might not be achievable until 2026 or 2027, given the current state of technology.
Despite these near-term concerns, Jefferies acknowledged Apple's long-term potential in AI, describing the company as "the only hardware-software integrated smartphone player" with a significant advantage over its competitors. They highlighted Apple's strategic partnership with Taiwan Semiconductor Manufacturing Co. (TSMC) as a key factor that could help Apple expedite the development and commercialization of AI-enabling technologies.
"Apple's collaboration with TSMC gives it a long-term technological and cost advantage over the fragmented Android competition," Jefferies stated. This partnership is expected to help Apple secure lower costs for advanced nodes and support the deployment of its AI technologies at scale.
Adding to the concerns about Apple's immediate prospects, demand for the iPhone 16 has been underwhelming compared to previous launches. Rival smartphone manufacturers, including Samsung and various China-based companies, have been gaining market share in key regions, particularly in Asia, further intensifying competition.
Edison Lee, the Jefferies analyst who assumed coverage of Apple this week, echoed these concerns, stating that "a lack of material new features and limited AI capabilities mean high market expectations are unlikely to be met." Lee's assessment of Apple's stock, now rated as "Hold," underscores the challenges the tech giant faces in driving significant growth in a market increasingly saturated with similar offerings.
Looking further ahead, Jefferies remains optimistic about the launch of Apple's iPhone 17 in 2025, which is expected to feature more advanced AI capabilities and a sleeker design, possibly stimulating greater consumer demand. However, the investment firm also cautioned that until Apple's hardware undergoes a significant overhaul to support these AI features, achieving substantial gains in the smartphone market will be challenging.
The downgrade also comes as Apple grapples with its valuation concerns. With the stock trading at around 33 times earnings, Jefferies noted that current fiscal year 2024 earnings projections fall below consensus estimates. However, the firm suggested that Apple's fiscal year 2026 earnings could outperform expectations, driven by the potential introduction of AI-related subscription services.
While Jefferies expressed skepticism about Apple's short-term outlook, it remains confident in the company's ability to leverage its integrated ecosystem for long-term AI advancements. "We believe AAPL is the leader in mobile AI tech, and its chip-OS-AI integrated ecosystem positions it well ahead of its competition," analysts noted, pointing to Apple's ability to charge a fee for AI services in the future as a potential growth driver.
