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Recent challenges for Apple (AAPL) have pushed analysts to adopt a cautious stance on the stock. MoffettNathanson downgraded Apple to a “Sell” rating, citing a trifecta of challenges: weak consumer response to the AI-enabled iPhone 16, growing competition from Chinese rivals like Huawei, and looming regulatory risks from a U.S. antitrust case against Alphabet (GOOG). The downgrade was accompanied by a price target cut to $188 from $202, reflecting concerns about Apple’s ability to navigate these headwinds.
Analysts have raised questions about whether Apple’s heavily marketed “Apple Intelligence” features can drive demand for its latest devices. Meanwhile, Alphabet faces its own hurdles, as the DOJ lawsuit could disrupt its profitable search partnership with Apple.
Despite these setbacks, Apple continues to present a compelling long-term investment opportunity. Let’s explore the factors driving its potential.
About Apple Stock
Apple currently boasts a market capitalization of $3.58 trillion and continues to attract investor attention with its innovations in artificial intelligence (AI). As a leader in the smartphone market, Apple is expected to have sold 200 million iPhones in 2024, outpacing major competitors like Samsung and Huawei. With nearly 51% of its revenue generated from iPhone sales, Apple also offers a range of software services, including iCloud, TV+, and advertising, further solidifying its position in the evolving technology landscape.
After reaching an all-time high of $260.10 in late December, the stock has retreated by around 12%. This decline stems from weaker-than-expected iPhone sales, consumer indifference toward its AI features, increased competition in China, and regulatory uncertainties linked to its partnership with Google. Furthermore, macroeconomic pressures and supply chain disruptions have added to investor concerns.
Does Apple Lag Behind in the AI Race?
Apple's foray into AI with its Apple Intelligence suite has led to debate amongst industry experts and investors. While Apple continues to hold an edge in the consumer tech space, some argue that the company’s AI contributions fall short of keeping up with the competition between OpenAI and Google. Apple’s focus on privacy has limited the development of advanced AI features, leaving Siri and other tools lagging behind competitors.
Apple Intelligence has rolled out initial functionality including email writing tools, notification summaries, and task management, but the consumer response has been underwhelming. While CEO Tim Cook has expressed optimism about the potential iPhone upgrade cycle these features could drive, it appears there is no real demand for them yet.
On the flip side, Wedbush analyst Dan Ives dismissed concerns over Apple’s shortcomings in AI. He believes that Apple Intelligence will drive record iPhone sales and boost Apple’s market value to $5 trillion in 18 months. However, without a clear strategy to monetize AI through subscription services or App Store integrations, Apple’s current efforts may struggle to gain traction.
Apple Beats Q4 Earnings Estimate
In the financial realm, Apple presents a solid, profitable business. The tech giant recently released its fourth-quarter fiscal 2024 results in October, surpassing analyst estimates on both revenue and earnings. Quarterly revenue rose 6% year-over-year to $94.9 billion, driven by strong iPhone sales and services growth. Services revenue hit a record $25 billion, marking a 12% increase, supported by gains in both developed and emerging markets. However, wearables and accessories revenue saw a 3% decline, bringing in $9 billion.
Net income for the quarter came in at $14.7 billion, down from $22.96 billion last year, largely due to a one-time $10.2 billion charge related to European tax adjustments. Excluding this charge, adjusted net income grew 9% year-over-year, and adjusted EPS climbed 12% year-over-year to $1.64, beating analyst expectations of $1.60 per share. Free cash flow for the period was an impressive $27 billion, while Apple’s cash reserves stood at $50 billion.
During the earnings call, Cook stated, “With the launch of Apple Intelligence and the iPhone 16 lineup, we’re excited to offer transformative technology that enhances privacy and user experience. These are only the first steps in what generative AI can achieve.” He expressed optimism about Apple’s positioning going into the holiday season, citing customer satisfaction rates of 98% for the iPhone 15 family.
Looking ahead, Apple provided guidance for low- to mid-single-digit revenue growth in the next quarter, with gross margins expected in the range of 46%-47%. Analysts anticipate full-year revenue at $4.14 billion and adjusted EPS at $7.43 for the year.
What Do Analysts Think About Apple Stock?
Despite Moffett Nathanson downgrading Apple and expressing concerns about its position in the AI race, Wedbush has maintained a bullish stance on Apple and predicted that it would be one of three companies to reach a $4 trillion valuation by 2025.
Ives, who is a prominent advocate of the AI boom, emphasizes the potential of Apple Intelligence and the iPhone 16 as catalysts for a "Supercycle." He projects a significant upside for the stock, raising his 12-month price target to $325 per share, which implies a 34% gain from current levels. He believes Apple’s growth will be fueled by underestimated AI-driven services revenue and strong sales in China.
Meanwhile, Jefferies analyst Edison Lee offered a more cautious perspective, warning that Apple’s gross margins could face pressure if tariff exemptions are not secured, potentially affecting its dominance in emerging markets.
Overall, Wall Street holds a “Moderate Buy” consensus for Apple, with a mean price target of $243, implying modest 3% upside potential from current levels.
The Bottom Line
Following the recent correction, AAPL is now trading at much more appealing multiples. Its forward earnings ratio of 32.67x is just 20% higher than the sector median, which is not bad within the technology sector, especially when compared to Nvidia (NVDA), which trades at 50.48 times forward earnings.
However, some investors argue that AAPL remains comparatively expensive relative to its five-year average, raising concerns about whether the company can justify its current valuation. Analyst forecasts suggest only a 10% earnings increase over the next three years, which might not fully support the premium pricing.
Given the current downward trajectory, waiting for a further dip could be a strategic move. Investors seeking better entry points might find value after additional declines, aligning purchases with a more favorable risk-reward scenario.
