The past year has seen a significant decline in Apple stock, with the latest blow coming from Barclays strategists. Led by Tim Long, the team changed their rating for Apple to Underweight from Equal Weight, setting a price target at $160, which is approximately 14% lower than the stock’s current level.
While Long’s perspective on Apple is less optimistic compared to his peers on Wall Street, he is not alone in his concerns. According to FactSet, out of the 44 analysts covering the stock, 60% maintain a Buy rating, 30% rate it as Hold, and only 10% consider it Underweight or Sell. This distribution has shifted from the first quarter of 2023 when the ratings were at 78%, 17%, and 5%, respectively.
The downgrades have been accumulating over time. Beginning in May, analyst Ananda Baruah from Loop Capital downgraded the stock to Hold from Buy. Subsequently, in June, Tom Forte from D.A. Davidson and David Vogt from UBS followed suit. In August, Barton Crockett from Rosenblatt Securities joined the downgrading trend, and in October, Brandon Nispel from KeyBanc also lowered Apple’s rating to Sector Weight from Overweight.
Apple has yet to issue an official statement regarding these recent developments.
While previous downgrades did not significantly impact Apple’s stock performance, Barclays’ shift to a Sell rating appears to have rattled investors more substantially. On Tuesday, the stock experienced a decline of 4.4%, making it the second-largest drop following the 4.8% dive on Aug. 4 when Apple announced disappointing June-quarter results.
Analysts are primarily concerned about the softness in iPhone sales and the revenue generated from services like the App Store, Apple Music, and Apple TV+. Additionally, their confidence in Apple’s latest product, the augmented-reality headset called Vision Pro, is limited due to its high price, which is not expected to result in substantial revenue growth.
Given Apple stock’s current high valuation, there is not much excitement for future growth. Despite experiencing nearly a 50% rally in 2023, the stock is trading at 28 times the projected per-share earnings for the upcoming year, even though its sales have declined for four consecutive quarters compared to the previous year.
Apple’s Sustainability Concerns
In a recent note, an analyst expressed concerns about Apple’s sustained period of weak results and its dependence on multiple expansion. The analyst emphasized that this situation is not viable for the company in the long term. However, there are additional risks on the horizon.
One significant risk stems from the ongoing Department of Justice’s antitrust case against Google. The case revolves around Google’s multibillion-dollar payments to Apple, which enable Google to become the default search engine on iPhones and the Safari browser. If the court ruling terminates this partnership, Apple’s revenue could experience a significant downfall.
Despite these risks, Apple experienced a rally in 2023, largely fueled by expectations of potential gains from generative artificial intelligence (AI). By incorporating AI-related features, Apple aims to encourage more customers to upgrade their devices. Moreover, the widespread adoption of AI could lead to an influx of new applications in Apple’s App Store, allowing the company to generate additional revenue through app sales.
However, Apple’s competitors have made substantial strides in the AI space. An example is Google Assistant, which has already integrated Bard, Google’s generative AI chatbot. Despite this competition, Apple hasn’t divulged much about its strategies for generative AI and large language models, potentially hindering its market position. To remedy this, Apple needs to expedite its efforts in the AI sector.
Investors eagerly await Apple’s December-quarter earnings report, scheduled for release in a few weeks. This report will provide insight into Apple’s holiday sales following the iPhone 15’s launch in late September. Analysts anticipate a 0.8% increase in sales compared to last year, totaling $118 billion. If these expectations pan out, it would mark Apple’s first year-over-year growth since the September quarter of 2022. This positive outcome could reignite optimism among investors.
