Apple Shares Dip as Jefferies Lowers Rating Due to High Valuation

Shares in Apple experienced a 1.5% decline in premarket trading on Monday following a downgrade by Jefferies analysts, who revised their rating from Buy to Hold. The investment bank set a price target of $212.92 for Apple, indicating a potential downside of approximately 6% from the stock’s last closing price.

This downgrade raises concerns about the overly optimistic market expectations for the upcoming iPhone 16 and 17 models. Jefferies emphasized the company’s heavy dependence on iPhone sales, which represented 52% of its revenue in fiscal year 2023, as a significant factor contributing to their revised outlook.

Analysts argue that the anticipated 5%-10% unit growth for the new iPhone models is unrealistic due to the absence of major new features and limited advancements in AI capabilities. Initial expectations for the iPhone 16’s demand are lower than anticipated, with predictions indicating stagnant volume growth in the second half of 2024 compared to the iPhone 15, alongside a modest 2.5% lifecycle volume growth for the iPhone 16.

The report also questions the immediate impact of AI technology on smartphones, stating that true AI advancements are likely two to three years away. Current limitations in high-speed memory and advanced packaging technologies hinder smartphones’ AI capabilities.

Jefferies analysts asserted that expecting a rapid replacement cycle for smartphones due to AI advancements is premature. However, they noted that Apple plans to release a new, thinner model known as the “17 Air” in 2025, which may spur upgrade demand.

Despite the downgrade, Jefferies remains optimistic regarding Apple’s long-term AI potential, recognizing the company as the sole hardware-software integrated player in the smartphone market. By the end of fiscal year 2026, it is estimated that Apple will have 490 million AI-capable iPhones in circulation, with projections increasing to 845 million by fiscal year 2027. The introduction of Apple’s OpenELM model and another language learning model, Ferret-UI, is expected to strengthen its position in mobile AI technology.

The firm emphasized that Apple leads in mobile AI technology and has a significant edge over the fragmented Android ecosystem due to its integrated chip-OS-AI environment.

Additionally, Jefferies highlighted Apple’s strategic partnership with Taiwan Semiconductor Manufacturing, which provides the tech giant with a long-term technological and cost advantage. This collaboration is expected to accelerate the commercialization of AI-enabling technologies and reduce costs for advanced nodes compared to competitors.

In terms of valuation, Jefferies pointed out that while Apple’s stock may seem high in the short term, especially with fiscal year 2024 earnings projections anticipated to fall below consensus, there is potential for long-term growth driven by AI-related earnings. Expectations for Apple’s fiscal year 2026 earnings suggest they will exceed consensus figures, with an upside valuation based on the potential for the company to introduce a monthly fee for AI services, targeting a share price of $306.99.