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Apple (NYSE: AAPL), which is already in the correction territory after having fallen over 10% from its recent highs, is down around 2% in US premarket price action today after Jefferies downgraded the stock. Jefferies joins the growing list of brokerages that are turning bearish on Apple shares this year.
Jefferies analyst Edison Lee downgraded Apple to underperform from hold and cut his price target to $200.75 from $211.84. The current target price implies a potential downside of 12.7% over the next 12 months based on last week’s closing prices.
Jefferies Downgrades Apple Shares
Lee cites three main reasons for his pessimism towards Apple shares. Firstly, he wrote, “our concern about weak demand for iPhone has materialized.”
Lee who previously projected a 1% growth in iPhone shipments in the December quarter now projects a 2% in the quarter. Notably, earlier this month, UBS also slashed its estimates for Apple’s December quarter earnings below Street estimates. Its latest forecast calls for a 4% YoY decline in iPhone sales during the quarter.
Meanwhile, Lee is particularly circumspect about Apple’s China business even as he remains constructive on other international markets. Leading Apple analyst Ming-Chi Kuo also warned of a slowdown in Apple’s sales in China.
Apple Is Facing a Slowdown in China
According to data from research firm Canalys, Apple’s shipments in China fell 17% YoY in 2024 which was the biggest annual decline for the Cupertino-based country. Moreover, its shipments fell in all four quarters with the pace of decline widening to 25% in the fourth quarter.
Apple had a full-year market share of 15% in China last year while Huawei and Vivo respectively had a 16% and 17% share. Huawei has come up with competitively priced premium models and has grabbed significant market share from Apple.
In her note, Canalys research manager Amber Liu said, “Intense competition has led to a constantly shifting landscape, with vendors actively seeking to expand investments in their advantageous field.”
She added, “In addition to driving sales through seasonal promotions, Apple is enhancing its high-end competitiveness and user retention by improving retail experiences through channel management, offering trade-in programmes and expanding coverage of interest-free instalment plans.”
Apple Intelligence Features Are Not Available in China
Notably, Apple offered discounts on the latest iPhone 16 in China earlier this month after Huawei lowered prices on its models. Several factors seem to be hampering iPhone sales in China including the unavailability of “Apple Intelligence” features.
These artificial intelligence (AI) features were expected to be the key selling point for iPhone 16 but were launched much after the model went on sale. Also, these features are not available in China and the E.U. due to regulatory issues.
US-China Tensions Are Working to the Deterrent of US Brands
Meanwhile, growing US-China tensions are also working to the detriment of US brands. China is increasingly becoming a tough market for foreign brands like Apple, General Motors, and Starbucks and they have been losing market share to domestic Chinese companies.
Notably, apart from being the second biggest market for Apple, China is also the key sourcing destination for the iPhone maker. However, it has been looking to increase sourcing from other Asian countries, and Foxconn, which makes most iPhones globally is expanding its footprint in India.
Jefferies is Worried About AAPL’s March Quarter Outlook
Jefferies is also worried about Apple’s sales outlook in the current quarter. “Even though the market is optimistic about China demand given [government] subsidies, the new 2025 policy limits smartphone subsidies,” said Lee in his note. Specifically, the subsidy is limited to models that have an average selling price of around $820 equivalent in domestic currency. “That will exclude the majority of iPhone models,” said Lee.
While markets are bullish on the lower-end iPhone SE that is expected to be launched soon, Lee does not share the optimism.
AI-enabled Smartphones
Finally, Jefferies is circumspect about the sales outlook of AI-enabled smartphones. Referring to third-party survey results, he wrote, “U.S. consumers do not yet find smartphone AI useful.”
“We believe smartphone players are generally very cost sensitive, since it is a highly competitive industry and differentiation is becoming more difficult,” wrote Lee in his note. He added, “If the WMCM technology were delayed for cost reason, we believe that would imply the incremental revenue potential that would be enabled by AI services may face more uncertainty than before.”
MoffettNathanson Also Downgraded Apple
This is the second downgrade for Apple this year and previously MoffettNathanson downgraded the iPhone maker from a “hold” to “sell” citing what it termed a “decidedly unattractive outlook.” In his note, analyst Craig Moffett said, “Much has been made of the fact that Apple’s shares have moved steadily higher over the past few months in the absence of any real news. But that’s not actually correct.”
He added, “In fact, there has been a great deal of Apple-relevant news. It’s just that all of it has been bad.” Moffett also pointed to Apple’s valuation and said, “A valuation that was already rich got richer, even as the rationale for why it was rich has taken on water.”
Apple Will Release Fiscal Q1 Earnings on Jan. 30
Apple will release its fiscal Q1 2025 earnings on January 30. During the previous earnings call, Apple said that it expects its revenues to rise by “low to mid-single digits” in the December quarter. The company expects services revenue to grow double digits in the current fiscal quarter, at a similar pace in the last fiscal year where the segment’s revenues rose 12.9%. It expects its gross margins to be between 46%-47% in the first quarter of its fiscal year 2025.
Meanwhile, analysts are now increasingly getting apprehensive about the company delivering on the revenue forecast amid tepid expectations from iPhone sales that account for around half of Apple’s revenues.
