Jefferies Downgrades Apple Ahead of Earnings, Warning of Missed Sales and Bumpy Outlook

Apple has just received a sell warning ahead of its earnings report, as the tech giant struggles with sales in China and a perceived lack of impressive AI features.

Analyst Edison Lee on Monday downgraded Apple shares to underperform from hold and reduced the price target to $200.75 from $211.84, reflecting the potential for shares to drop by 13%.

Lee anticipates that the company will miss its revenue growth forecast of 5% during the quarter, which is set to be announced on January 30th after the market close. Furthermore, the analyst expects Apple to guide its second-quarter revenue to a low single-digit percentage increase, falling short of consensus estimates.

He described the outlook for artificial intelligence at Apple as subdued, which could be troubling for market participants who have been focused on the potential of AI technology for over a year. Additionally, poor iPhone sales are a contributing factor to the weak revenue outlook.

Our concern about weak demand for iPhone has materialized, Lee wrote, indicating a risk for the December-quarter numbers that Apple is due to report on January 30. He previously expected a slight uptick in shipments, or 1% growth, but now projects a 2% decline for the quarter.

The China market appears particularly weak, according to Lee, despite other international regions being in somewhat better shape. He highlighted China's consumption downgrade trend, noting that iPhone selling prices remain significantly higher than those of Chinese flagship Android models.

Apple's March-quarter outlook may also be worrisome. Even though the market is optimistic about China demand given [government] subsidies, the new 2025 policy limits smartphone subsidies, including restrictions to approximately $70 per unit and only to models with an average selling price around $820, he wrote. That will exclude the majority of iPhone models, Lee continued.

Investors may be optimistic about the anticipated launch of a new lower-end iPhone SE model, but Lee is uncertain that demand for this smartphone will meet expectations. While the phone may have access to Apple Intelligence AI software, it may only have one camera, making it less competitive against newer base-level iPhones and Androids, as well as older iPhone 13 Pro and Pro Max models with three high-quality cameras. According to Lee, Apple Intelligence isn't likely to be a significant selling point.

He also noted that U.S. consumers do not yet find smartphone AI useful, based on third-party survey results. He sees potential supply-chain tradeoffs as Apple collaborates with TSMC on a special packaging technology known as wafer-level multi-chip module (WMCM) that could enhance on-device AI. However, Lee questions whether the additional cost is justified.

We believe smartphone players are generally very cost-sensitive, since it is a highly competitive industry and differentiation is becoming more difficult, he wrote. Apple, known for its industry-leading gross margins, may face challenges if WMCM technology is delayed due to cost concerns, potentially impacting the incremental revenue potential enabled by AI services.

Adding to the concerns, TSMC, Apple's key chip manufacturer, recently reported record-high earnings driven by consumer demand and AI enthusiasm. However, TSMC also projected a 6% sequential decline in first-quarter revenue, citing seasonal impacts on smartphone demand, which naturally points to the iPhone series.