Apple's stock draws a downgrade as AI optimism may be very premature

By Emily Bary

A Jefferies analyst says it will take time for smartphone technology to truly support AI. That means sales expectations for the iPhone 16, and perhaps even the iPhone 17, may be too high.

Hoping the iPhone 16 will drive a big wave of device upgrades? That view looks "premature," in the view of one analyst.

Jefferies' Edison Lee assumed coverage of Apple Inc. shares (AAPL) over the weekend, and in doing so, downgraded the stock to hold from buy. By his assessment, it will take some time for artificial intelligence to improve the smartphone experience.

"Smartphone hardware needs rework before being capable of serious AI, with likely timeline of 2026/27," Lee said. He noted that "smartphones lack high-speed memory and advanced packaging tech" that facilitate rapid data transfers, and he said that while companies are trying to improve in this regard, it could take several years before they're ready for "commercialization."

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With that backdrop, he worries that investors might be too upbeat with their iPhone 16 sales projections - and even potentially with iPhone 17 estimates. "A lack of material new features and limited AI coverage mean high market expectations (5%-10% unit growth) are unlikely to be met," he wrote, and he already glimpses "weaker-than-expected initial demand" for the iPhone 16 in its first few weeks of sales.

Meanwhile, the iPhone 17 could come with some puts and takes, as the packaging technology still may not be ready then. But Apple seems "likely to introduce a thin model (17 Air) in 2025, which could attract more upgrade demand," Lee wrote.

He also flagged concerns about the stock's valuation. "After the strong rally driven by strong expectations for Apple Intelligence, [Apple's price-to-earnings] valuation is now near all-time high," Lee said in his note to clients.

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Thinking longer-term, though, Lee is more upbeat about Apple's positioning as "the only hardware-software integrated player that can leverage proprietary data to offer low-cost, personalized AI services." He sees a world in which Apple will be able to charge $10 a month for AI, one factor driving his above-consensus earnings projections for fiscal 2026.

Apple shares are down about 1% in premarket trading Monday. They've gained 18% so far this year, as the S&P 500 SPX has advanced 21%.

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-Emily Bary

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10-07-24 0830ET

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