Underperform rating for Apple stock as analyst cites expensive valuation and muted AI demand

On Tuesday, Jefferies analysts downgraded Apple (NASDAQ:AAPL) stock from 'Hold' to 'Underperform' and reduced the price target to $200.75 from the previous $211.84. The firm's assessment of the $3.46 trillion tech giant comes as InvestingPro data shows the stock trading at $229.98, with analysis indicating potential overvaluation relative to its Fair Value.

The downgrade by Jefferies is attributed to Apple's perceived expensive valuation, which is currently at 32 times the forecasted 2025 earnings per share (EPS), and a price-to-earnings growth (PEG) ratio of 1.7 times for the same year. These metrics are coupled with a 15% premium over the firm's long-term discounted cash flow (DCF) estimate. InvestingPro data confirms the rich valuation, showing a current P/E ratio of 37.58x and highlighting this as one of 13 key insights available to subscribers.

Jefferies also expressed concerns over the consensus forecasts for Apple, which they believe are overly optimistic, both for the near-term and mid-term. Despite recent reductions in consensus estimates, Jefferies suggests they may need to be lowered further.

Additionally, the analysts are skeptical about consumer response to AI functions on smartphones, including Apple's own Apple Intelligence. They anticipate that user feedback will remain subdued. Moreover, there is an expectation of increased debate and a potential confirmation of delays in Apple's advanced packaging roadmap for the iPhone, which could dampen prospects for AI features on smartphones.

The report highlights upcoming catalysts that may lead to underperformance, such as Apple's first-quarter results for fiscal year 2025 and the subsequent revenue guidance for the second quarter. With earnings due in 9 days and analyst price targets ranging from $184 to $325, investors seeking deeper insights can access comprehensive analysis through InvestingPro's detailed research reports.

In the mid-term, the sales performance of the iPhone 17 and consumer interest in Apple Intelligence as it expands to more countries and languages by the end of 2025 will be crucial indicators for the company's $391.04 billion revenue stream.

In other recent news, Apple has temporarily suspended the use of artificial intelligence news summaries in its apps, following the identification of inaccuracies in the AI system by the British Broadcasting Corporation (BBC). This decision impacts only the users of Apple's beta software.

In the realm of financial analysis, Evercore ISI has reiterated its Outperform rating for Apple, highlighting the company's potential for sustained growth in emerging markets and strong performance in its Services and Wearables segments. The firm anticipates a robust iPhone cycle that could surpass typical seasonal growth.

In a related development, Toni Sacconaghi Jr., a prominent tech analyst from Bernstein who closely monitored tech stocks including Apple, announced his retirement plans. Apple also experienced a significant year-over-year increase in units shipped in the fourth quarter of 2024, pushing its global market share to 10.1%.

On the international front, a phone conversation between the leaders of the US and China, the specifics of which were not disclosed, resulted in a positive market response. This development has been interpreted as a potential thaw in tense trade relations, causing an uptick in S&P 500 futures.

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