Apple Tumbles on Barclays Downgrade Over Cooling iPhone Demand

Apple shares fell in the early US cash session following a downgrade by Barclays analysts, who are cautioning about a slowdown in the sales of iPhones and MacBooks. 

Barclays analyst Tim Long slashed Apple from “Equal-Weight” to “Underweight” with a slight downshift in price target, from $161 to $160. The price target indicates Long expects a 17% share decline this year. 

“We expect reversion after a year when most quarters were missed, and the stock outperformed,” Long said. Tens of billions of dollars in stock buybacks could explain four quarters of revenue declines but rising share price. 

Long said, “We are slightly lowering our AAPL estimates following another round of checks. We are still picking up a weakness on iPhone volumes and mix, as well as a lack of bounce-back in Macs, iPads, and wearables.” Those checks include a worsening downturn in demand for the iPhone 15 out of China, the analyst continued, adding “together with developed markets remaining soft.” 

Long’s view of a weakening outlook for Apple products is based on these factors: 

1.  Expect continued iPhone weakness through the launch of the iPhone 16. Our checks remain negative on volumes and mix for iPhone 15, and we see no features or upgrades that are likely to make the iPhone 16 more compelling.

2. Believe Mac and iPad need to revert further to pre-Covid levels. These two products combined were basically showing no growth pre-Covid, but are still running 20-30% above those levels despite the rest of the industry correcting.

3. See growth deceleration in Services, with regulatory risk ramping. We model ~10% and ~8%growth in Services in FY24 and FY25, well below prior growth estimate of ~20%. In 2024, we should get an initial determination on the Google TAC, and some app store investigations could intensify.

4. Valuation stretched, particularly after several weak quarters. AAPL stock was a strong performer in CY23, but EPS declined through the year, so it was all multiple expansion. Given that We believe numbers will not be moving higher, we see P/E multiple pressure going into the new year. 

5. Longer term, diminishing returns on the ecosystem. AAPL remains a very strong ecosystem,moving from Mac-driven to iPhone-driven over the last decade. We believe there is a less ecosystem pull-through with new products/services, which will make growth harder over the next several years.

Apple shares recorded a monster gain in 2023, rising nearly 50%. However, Long warned: “A continued period of weak results coupled with multiple expansion is not sustainable.” 

Apple shares fell 3% on the downgrade. 

This is bad news for overall US equity indexes – because the Magnificent Seven (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) have been responsible for about two-thirds of the S&P 500 Index’s advance last year. 

Full downgrade note available to pro subs in the usual place.