As Apple prepares to release its fourth-quarter earnings report, industry experts are expressing concerns about the tech giant’s future performance. Melius Research analyst Ben Reitzes, who holds a Buy rating on Apple stock with a target price of $240, highlights several key issues that the company needs to address.
Pressure to Demonstrate Growth
Despite having one of the most bullish outlooks on Wall Street, with an average target price of $200 according to FactSet, Apple’s stock is currently hovering around $179, having experienced a 5% decline in the past three months. To sustain its premium valuation, Apple must justify its position and show progress in key areas.
Revenue Decline and Future Guidance
A major concern for Apple is its declining revenue, which has persisted for three consecutive quarters. While this trend is expected to continue in the upcoming earnings report, investors will be looking for guidance on the December quarter and a clear timeline for the company’s return to growth.
Managing Challenges in China
China represents both a challenge and an opportunity for Apple, as it accounts for approximately 20% of the company’s revenue. Reitzes emphasizes the importance of Apple outlining its strategy for the iPhone, app store, and supply chain in China. Though there have been headline risks related to Chinese government regulations and competition from Huawei, the analyst believes they may be overblown. However, potential stricter controls on foreign applications on iPhones in China could pose a more significant threat.
Future Growth Potential
Reitzes remains optimistic about Apple’s future growth prospects. He anticipates ongoing upgrades to the iPhone 15, increased store traffic due to the launch of the Vision Pro, and upgrades to the iPad and Mac contributing to revenue growth in the coming years.
Apple has yet to respond to Reitzes’ report.
The Impact of China’s App Ban on Apple
According to Reitzes, if the Chinese government successfully restricts the download of western apps on Apple phones, it could have long-term consequences for the iPhone’s differentiation in the region. Apple will not only have to negotiate with the Chinese government but also demonstrate its ability to diversify its supply chain without incurring additional costs.
Embracing Artificial Intelligence for Growth
While Apple has thus far remained relatively detached from the artificial intelligence (AI) hype, it may need to change its approach to appease investors seeking growth drivers. There is a growing need for Apple to develop a clear strategy for generative AI and potentially overhaul its digital assistant Siri. Reitzes suggests that a more powerful Siri and other generative AI products could help reignite demand for iPhones and other Apple devices. Investors may witness how AI drives an upgrade cycle for iOS devices and new services from Apple in the next two years.
The Antitrust Trial and Apple’s Dilemma
Google’s ongoing antitrust trial has drawn attention to the annual payments it makes to Apple for being the default search engine on iPhones and Safari web browsers. Speculation has arisen that this agreement could be invalidated by the courts, resulting in Apple losing approximately $18 billion to $20 billion per year from Google. Reitzes warns that if these payments and profit-sharing were to cease, it could significantly impact Apple’s gross margins. This presents Apple with the challenge of determining how best to respond. While launching its own search engine is an option, Reitzes believes it would be more fruitful for Apple to concentrate on innovative generative AI services, which have the potential to provide a major boost.