Apple Shares Decline After Jefferies Downgrade

Shares in Apple (NASDAQ:AAPL) fell by 1.5% in premarket trading on Monday following Jefferies analysts’ decision to cut their rating from Buy to Hold. The investment bank set a price target of $212.92, indicating a potential downside of approximately 6% from the last closing price.

Analysts’ Concerns

The downgrade stems from concerns about overestimated market expectations for the upcoming iPhone 16 and 17 models. Apple’s heavy reliance on iPhone sales, which accounted for 52% of the company’s revenue in fiscal year 2023, was cited as a major factor leading to the rating revision.

The analysts expressed skepticism regarding the market’s anticipation of 5%-10% unit growth for the new models, highlighting a lack of significant new features and limited AI capabilities. Initial demand for the iPhone 16 is predicted to be weaker than expected, with flat volume growth projected for the second half of calendar year 2024 compared to the iPhone 15, and only 2.5% growth in lifecycle volume for the iPhone 16.

Limitations in AI Technology

The report also raised doubts about the near-term impact of AI in smartphones, stating that AI technology is likely 2-3 years away from significant implementation. Current limitations with high-speed memory and advanced packaging technology in smartphones restrict their AI functionalities. Jefferies believes that expecting an accelerated replacement cycle due to AI capabilities is premature.

However, Apple is set to introduce a new, thinner iPhone model, dubbed the 17 Air, in 2025, which could invigorate upgrade demand.

Long-term Outlook for Apple

Jefferies remains optimistic about Apple’s long-term AI potential, recognizing the company as the only hardware-software integrated smartphone player in the market. By the fourth quarter of fiscal year 2026, it is estimated that Apple could have 490 million AI-capable iPhones in use, potentially increasing to 845 million by fiscal year 2027. Apple’s OpenELM model and another language learning model, Ferret-UI, are expected to enhance its leadership in mobile AI technology.

Analysts noted, “We believe AAPL is the leader in mobile AI tech, and its chip-OS-AI integrated ecosystem puts it far ahead of the fragmented Android competition.”

Jefferies also emphasizes Apple’s strategic partnership with Taiwan Semiconductor Manufacturing (TSM), giving Apple a technological and cost advantage. This collaboration is anticipated to aid Apple in swiftly commercializing AI-enabling technologies and securing lower advanced node costs compared to competitors.

Valuation Perspective

In terms of valuation, Jefferies mentions that despite Apple’s stock appearing elevated in the near term—especially as fiscal year 2024 earnings projections fall below consensus—there is potential for long-term upside driven by AI-related fee income. Earnings for fiscal year 2026 are expected to surpass consensus, and the firm’s upside valuation considers the possibility of Apple charging a monthly fee for AI services, with a target of $306.99.