On Monday, Jefferies, a global investment banking firm, downgraded Apple Inc (NASDAQ:AAPL). stock from a Buy to a Hold rating, while slightly raising the price target to $212.92 from $205.00. The firm cited concerns about the upcoming iPhone's capabilities in artificial intelligence (AI) as a reason for the more cautious stance.
The analyst from Jefferies highlighted Apple's unique position as the sole hardware-software integrated player capable of leveraging proprietary data to offer personalized AI services at a low cost. Despite this advantage, the analyst believes that Apple's smartphone hardware requires significant rework to be seriously capable of AI, with such advancements not expected until around 2026 or 2027.
According to the analyst, the high market expectations for the iPhone 16 and 17 models are considered premature. Jefferies' forecast for Apple's fourth-quarter fiscal year 2024 net profit falls below the consensus, and the firm notes that Apple's current adjusted price-to-earnings ratio for fiscal year 2024 is near its all-time high.
The report also points out that the iPhone remains central to Apple's business model, having contributed to 52% of the company's fiscal year 2023 revenue. It also drives the adoption of other Apple devices and services revenue growth.
However, Jefferies anticipates that the lack of significant new features and limited AI capabilities in upcoming models may lead to not meeting the high market expectations of 5%-10% unit growth.
Jefferies' analysis predicts weaker-than-expected initial demand for the iPhone 16, forecasting flattish volume growth compared to the iPhone 15 for the second half of the calendar year 2024. For the entire lifecycle of the iPhone 16, the firm expects only a 2.5% growth in volume.
In other recent news, Foxconn, a major assembler for Apple Inc's iPhones, reported a significant 20.2% increase in its Q3 revenue, surpassing initial forecasts. This growth is seen as an indicator of demand for Apple's products.
In the meantime, Evercore ISI maintained its Outperform rating for Apple, citing stable demand for the new iPhone 16 and 16 Pro models. They also highlighted a 14% growth in App Store revenues, which is expected to contribute to Apple's Services revenue growth.
Mizuho analysts have noted that Apple's focus on artificial intelligence (AI) services could drive demand for various iPhone 16 components, potentially influencing the value chain. BofA Securities, maintaining its Buy rating on Apple, suggested that the initial demand for new iPhone models may surge once AI features become available.
In addition to these financial developments, Apple is preparing for the production of a new iPhone SE and iPad Air models. However, the National Labor Relations Board (NLRB) has filed a complaint against Apple, alleging the company of implementing illegal workplace rules.
Lastly, a recent fire at a Tata Group facility in Tamil Nadu, which has halted the production of iPhone components, might disrupt Apple's supply chain.
InvestingPro Insights
As we consider Jefferies' downgrade of Apple Inc., it's worth examining some key financial metrics and insights from InvestingPro to provide a more comprehensive view of the company's current position.
According to InvestingPro data, Apple's market capitalization stands at an impressive $3.45 trillion, reflecting its dominant position in the technology sector. The company's P/E ratio of 34.15 aligns with Jefferies' observation that Apple is trading at a high earnings multiple. This valuation metric suggests that investors are pricing in significant growth expectations, which may be challenging to meet given the concerns raised about AI capabilities in upcoming iPhone models.
InvestingPro Tips highlight that Apple has raised its dividend for 12 consecutive years, indicating a strong commitment to shareholder returns. This consistent dividend growth, coupled with a current dividend yield of 0.44%, may provide some support for the stock even as growth expectations are recalibrated.
Another relevant InvestingPro Tip notes that Apple is trading near its 52-week high, with a price that is 95.6% of its peak. This high valuation, combined with Jefferies' concerns about future iPhone capabilities, underscores the importance of carefully evaluating the company's growth prospects.
For investors seeking a deeper understanding of Apple's financial health and market position, InvestingPro offers 14 additional tips, providing a more comprehensive analysis to inform investment decisions.
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