Jefferies downgrades Apple's stock, taking a cautious view on the next couple of quarters and on broader AI demand.
Just five sell-side analysts rate Apple Inc.'s stock at the equivalent of sell, counting Jefferies' Edison Lee, who turned bearish late Monday.
Lee has three reasons for his pessimism, as he thinks about Apple's next couple of earnings reports as well as its broader attempts to get traction from artificial intelligence.
To start, "our concern about weak demand for iPhone has materialized," Lee wrote, meaning risk for the December-quarter numbers that Apple is due to report on Jan. 30. He previously expected a slight uptick in shipments, or 1% growth. Now he projects that they fell 2% in the quarter.
The China market seems particularly weak, according to Lee, even as other international regions could be in somewhat better shape. Lee called out China's "consumption downgrade trend, as iPhone's selling prices are still meaningfully higher than those of Chinese flagship Android models."
Lee is also worried about Apple's March-quarter outlook. "Even though the market is optimistic about China demand given [government] subsidies, the new 2025 policy limits smartphone subsidies," including by restricting them to the equivalent of about $70 each and also to models with the equivalent of a roughly $820 average selling price, he wrote.
"That will exclude the majority of iPhone models," Lee continued.
Investors may be excited about the anticipated launch of a new lower-end iPhone SE model soon, but Lee isn't sure demand for that smartphone will live up to expectations. The phone may have access to the Apple Intelligence AI software - but it also may only have one camera. That means the phone won't so much compete against newer base-level iPhone and Androids, but rather older iPhone 13 Pro and Pro Max phones that have three "high-quality cameras." Apple Intelligence isn't likely to be a selling point, in his view.
That gets at his next point, which is that "U.S. consumers do not yet find smartphone AI useful," according to third-party survey results. Lee also sees the potential for supply-chain tradeoffs, as Apple has been working with Taiwan Semiconductor Manufacturing. on a special packaging technology, known as wafer-level multi-chip module, that can help enable better on-device AI. But whether that's worth the extra cost is an open question, in Lee's view.
"We believe smartphone players are generally very cost sensitive, since it is a highly competitive industry and differentiation is becoming more difficult," he wrote, and Apple is known for industry-leading gross margins. "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."
Lee now has a $200.75 target price on Apple's stock, which closed Friday near $230. He cut his rating to underperform from hold.
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