As a rare movement, Jeffreies' analysts have lowered one of the largest companies in the world. apple (AAPL -0.39%)Performance decreases. Since analysts in Wall Street are known for being bullish, underpoers and selling ratings tend to be small in the overall evaluation of analysts.
Jeffreies believes that Apple's artificial intelligence (AI) function does not sympathize with consumers, so the number of iPhone shipments in the fourth quarter will be sluggish. The company quoted a survey that most US consumers do not find the AI function very useful. The company believes that this does not have an iPhone AI power upgrade cycle.
Jeffreies expects Apple to be less than the current analyst forecast for sales, and is expected to grow 5 % in the end of January the fourth quarter. The company also believes that Apple's first quarter guidance is likely to disappoint. The target stock price is $ 200.75.
Considering the rarely underpoint rating, many investors may be wondering if it is time to sell shares.
Powerful business model
There is one thing that does not change, despite the downgrade related to iPhone sales predictions. That means Apple has a powerful business model. The company's sales growth lacked a considerable vividness throughout the 2024 fiscal year ending in September. Sales increased 2%year -on -year, up to 6%in the fourth quarter of the fiscal year. Meanwhile, the company's device's earnings have worsened further. In fact, product revenue decreased by 1% in the fiscal year, but increased by 4% in the previous fiscal year.
Apple is growing strongly with high -profit service income. This includes App Store, search sharing revenue, Apple TV, Apple Pay, and other subscriptions and services. The service revenue for the previous year increased 13%, increasing 12% in the fourth quarter.
The gross profit margin of the service is nearly 74%, but the gross profit margin of the product is about 37%. If the profit margin of the service is almost doubled, the earnings obtained from the service will be easier to lose to the final profit. As a result, the company was able to increase the profit per share by 11%after adjustment, despite the increase in sales last year by only 2%.
Image source: Getty image.
At this time, the large upgrade cycle of the iPhone related to the Apple Intelligence seems to have been realized. The company's services had several issues, including AI generating incorrect news alerts. On the other hand, iPhone and Android smartphone users have surveyed that AI functions have little value. Next, there is also a question of whether the user finally pays the AI subscription service. At the moment, Apple seems to be a cost, rather than offset the benefits of profits.
The company is not able to incorporate Apple Intelligence into Chinese smartphones. In China, it has already struggled with local competitors, and the iPhone sales in China decreased by 18%in the fourth quarter, according to CounterPoint Research. On the other hand, rival Huawei's smartphone sales increased by 15.5 % in the quarter.
After Apple initially announced the latest version, the sale of iPhone in China was strong. However, since the company's AI has not been approved in China, it is necessary to find a local AI partner that incorporates its own technology to execute Apple Intelligence in China. Apple is mainly competing in the Chinese premium smartphone market, so he is leaving his competitors due to lack of the latest AI technology.
Other than selling smartphones, Apple faces another big risk related to smartphones. alphabet An antitrust lawsuit. Alphabets have paid $ 20 billion to Apple annually as part of the profit distribution model to make Google a default search engine for the company's browser “Safari”. This revenue is essentially a pure margin and is directly linked to operating income. Since the alphabet loses in the antitrust lawsuit and this agreement is in danger, this lawsuit may make a significant change, so the impact on this source of revenue is not yet forecasted. 。 However, if this ruling is appealing, the impact will be likely to be many years ahead, and there are reasons why the two companies are trying to protect what they are currently doing.
Expanding evaluation
Apple stocks have risen many times over the past few years. The company's stock price return (PER) has actually increased tripled from 12 times to 36 times, and its future PER based on this year's expectations is about 30 times.
AAPL PE ratio (futures) Data Y chart
Since these businesses tend to achieve a higher magnification than the hardware business, some of the expansion of this magnification may be due to the transition to a highly profitable service revenue. Apple also proves that it is a stable company that tends to have a long -lasting but some predictable replacement cycle.
Nevertheless, expectations for upgrading the iPhone have diminished, and the stock prices have expanded many times in the past six years, so it is wise to get some profits with this stock.
Suzanne Fly, an alphabet executive, is a member of the Board of Directors of Motry Fool's Day. Geoffrey Seiler belongs to Alphabet. Motley Fool's Day has a position to Alphabet and Apple and recommend them. Motley Fool's Day has a disclosure policy.
