Apple Downgraded Amid Concerns Over Weak iPhone Sales and AI Shortfall

Apple Inc. has faced two analyst downgrades, signaling growing investor apprehension about the company's declining iPhone sales and the inability of artificial intelligence (AI) to stimulate growth.

Stock Performance

Shares of Apple dropped 3.2% on Tuesday, reaching their lowest closing price since November and continuing a downward trend that began earlier in the year. The stock has shed 11% in January, on track for its most significant monthly decline since December 2022. Since December's peak, the stock has lost 14% of its value.

The decline wiped out over $110 billion from the company's market capitalization, causing it to fall below Nvidia Corp. in market size for the first time since November. Apple's valuation now stands at $3.35 trillion compared to Nvidia's $3.45 trillion.

Analyst Downgrades

Loop Capital has downgraded Apple to hold, while Jefferies has cut its rating to underperform, joining a small group of firms holding an equivalent of a sell rating on the stock.

Edison Lee, an analyst at Jefferies, attributed the recent weakness in iPhone sales to worse-than-expected results, with China being a major concern. Independent research suggests an 18.2% decline in iPhone sales in China during the December quarter, while global unit sales fell approximately 5% in the final quarter of 2022 amid intensified competition in China.

Lee also cited a third-party survey indicating that "US consumers do not yet find smartphone AI useful," making it unlikely to trigger a significant upgrade cycle in the near future.

Outlook and Consensus

Given these trends, Lee believes Apple's March quarter guidance may fall short of expectations.

Loop Capital anticipates a "material iPhone demand reduction" starting in the March quarter, which will "materially amplify" in subsequent quarters.

Despite the potential for drivers behind earlier buy ratings to materialize, analyst Ananda Baruah suggests it "certainly won't be for the next nine months given we're on the front end of 2.5 Q's of materially softening iPhone demand."

Apple is expected to release its first-quarter results next week. With the downgrades, Apple's recommendation consensus has dropped to 4.02 out of five, its lowest since May and down from an August peak of approximately 4.3.

Currently, over 60% of analysts tracked by Bloomberg recommend buying the stock, a rate notably lower than other megacap tech stocks where buy ratings often exceed 80% or even 90%.

MoffettNathanson previously downgraded the stock earlier this month due to concerns about China and the stock's valuation. Morgan Stanley named Seagate Technology as its top pick among IT hardware companies, replacing Apple.