Wall Street Is Downgrading Apple Stock. Should You Continue to Buy? History Offers an Important Clue

Apple (AAPL -0.57%) is one of the most successful companies in American history. Since the company went public in 1980, its shares have returned a whopping 187,580%. An investment of just $1,000 during its IPO would be worth more than $1.8 million today.

Alongside investors, consumers have also benefited from Apple's success. The company's iPhone, for example, has helped increase their productivity, connect them with friends and family, and put an endless stream of information at their fingertips.

However, as 2024 begins, some Wall Street analysts have taken a turn for the worse on Apple stock. According to Benzinga, the stock has received three downgrades from analyst firms so far (compared to just one upgrade). Additionally, a major investment bank lowered its price target.

Should we heed this new pessimism or continue to buy Apple shares?

Apple's iPhone 15 paves the way for on-device AI

Most Mac owners will tell you that it is one of the highest quality personal computers on the market. However, Apple's iPhone smartphone has been responsible for most of the company's value creation since its launch in 2007. There are 2.2 billion active iPhones worldwide today, and the device has also led to the development of multi-billion dollar product lines like the Watch and AirPods. .

The latest iPhone 15 Pro lineup also features the Apple-designed A17 Pro chip, which is a 3-nanometer processor considered the fastest in the smartphone industry. It paves the way for improvements to Apple's existing artificial intelligence (AI) software, such as the Siri voice assistant and the keyboard auto-correction feature.

Most power-hungry AI workloads, like OpenAI's ChatGPT chatbot, rely on external data centers to process requests because existing computers and devices simply don't have enough power to deliver results quickly. But everything is changing and the A17 Pro is a step in the right direction. You see, Apple is reportedly working internally on its own Large Language Models (LLM), which could become the basis of a chatbot designed specifically for its devices.

Imagine a ChatGPT-style tool built into every iPhone by default. It can organize text messages, create image and video content, manage your email inbox, and even organize your calendar. Additionally, a native chatbot would be incredibly secure because it would not need to send private information to a data center to process requests. Security has always been a priority for Apple.

Slowing iPhone sales growth has long concerned many Wall Street analysts because the smartphone market is saturated. Apple now relies primarily on upgrading existing customers, and the high-quality nature of the iPhone means these upgrades happen at a much slower pace.

New, faster AI-based chips could speed up the upgrade cycle in the future, especially as consumers become more accustomed to using AI in their daily lives. Given the huge installed base of iPhones worldwide, any AI software released by Apple could quickly become the most widely adopted in the world.

Image source: Getty Images.

Apple just ended a long streak of no revenue growth

Apple has just released its financial results for the first quarter of fiscal 2024 (ended December 30). Its total revenue increased 2.1% year-on-year, thanks to strong iPhone sales, which jumped 6%. The release of the iPhone 15 Pro in September is one of the main reasons for this strong performance, as it is the most significant upgrade in years thanks to its lightweight titanium frame and A17 chip .

Apple's services revenue grew 11.3%, outpacing all other segments. It includes sales from subscription services like Apple Music, Apple News and Apple TV+, as well as revenue from features like Apple Pay. Rapid growth in the services segment is critical to the tech titan's bottom line because it is more profitable than the company's hardware business (software can be developed once and sold an unlimited number of times with a limited additional cost).

An increase in income of 2.1% is modest to say the least. But it helped reverse a streak of year-over-year revenue declines that spanned the previous four consecutive quarters.

Going forward, investors will also be watching sales of the Vision Pro mixed reality headset, which is Apple's first foray into a new hardware platform since the watch launched in 2015. The company has reportedly sold 200,000 units of Vision Pro during the first 10 days. , a remarkable result considering the starting price of $3,499. Wall Street firm Wedbush estimates that Apple could sell 600,000 headsets in 2024 and 1 million in 2025.

The Vision Pro doesn't necessarily shake things up yet, as 600,000 units would translate to $2.1 billion in revenue, which is just 0.5% of the $389.9 billion in total revenue that analysts expect the company to generate in fiscal 2024.

Wall Street deteriorates on Apple shares in 2024

According to Benzinga, three Wall Street firms lowered their ratings on Apple shares in January:

  • Barclays downgraded Apple to underweight (from equal weight), lowering its price target to $160 from $161.
  • Piper Sandler downgraded the stock to neutral (from overweight), lowering its price target from $220 to $205.
  • Redburn Atlantic lowered Apple's rating to neutral (from buy), setting a price target of $200.

Barclays went even further in February and reduced its price target again, to $158. Then, investment banking J.P. Morgan lowered its price target from $225 to $215, while maintaining its overweight.

In comparison, there has only been one Apple stock upgrade this year. Bank of America raised its Buy rating (from neutral) and raised its price target from $208 to $225.

Should investors heed Wall Street's pessimistic tone or continue buying Apple stock?

Valuation is an area of ​​concern for investors. Based on Apple's trailing 12-month earnings per share of $6.42, its stock trades at a price-to-earnings (P/E) ratio of 29.2. This represents a slight discount from the company's P/E of 30.8. Nasdaq-100but Apple's sales growth is moderate compared to some of the tech giants that make up this index.

Theoretically, this means that the discount to the Nasdaq-100 is probably justified. But waiting for Apple stock to get cheaper has been a fool's game, historically speaking. For example, Apple stock has traded at a P/E ratio ranging from 35 to 10 over the past decade, and its stock price has still skyrocketed.

Generally speaking, investors who have sat idly waiting for a good deal on Apple stock since its IPO have likely missed out on substantial gains in the process:

AAPL/PE ratio data by Y Charts

That said, the company's lackluster growth is concerning. How Apple transitions the iPhone to a fully AI-enabled device could be the key to unlocking its next phase of growth. The Vision Pro platform could also help improve its results once the technology becomes cheaper. Additionally, while I wouldn't hang my hat on it in the short term, Apple is reportedly developing a car, which could one day become a significant source of revenue.

Given all this, Wall Street pessimism could be justified in the very short term, but Apple has enough potential growth drivers on the horizon to make its stock a long-term buy. Investors with a time horizon of five years or more will likely do well from there.

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