Apple Inc (NASDAQ:AAPL)’s growth is likely to remain under pressure due to persistently soft demand in developed markets, according to UBS, which has downgraded its rating on shares in the tech titan to ‘neutral’ from ‘buy’.

The investment bank anticipates that iPhone sales will decrease by 1%-2% in the latter half of 2023, with procurement expected to drop by 8%.

Revenue from Mac computers is also predicted to decline by 3%-5%. Despite these bearish prospects, UBS has slightly increased its price target (PT) for Apple to $190, from its previous $180 estimate, which is based on estimated future earnings per share (EPS) for the fiscal year 2025 of $6.70.

“Unfavorable” risk vs reward

In the note, analysts cited soft demand trends for Apple’s leading products, the iPhone and Mac computer.

“We are downgrading Apple shares to Neutral from Buy given persistent softness in developed markets and data that indicates growth is likely to remain under pressure,” UBS analysts wrote. That said, the analysts did raise their price target on Apple stock from $180 to $190, but expanded on its reasoning for simultaneously downgrading the rating.

“If Apple shares were to trade at our $190 PT, total shareholder return (price appreciation and dividends) less than 5% is insufficient in our view to maintain a Buy rating given softer fundamentals,” they explained.

“At 29x our (next twelve months) EPS forecast of $6.22, a one-year high, and a ~50% premium to the S&P 500, a multi-year high, we do not believe Apple shares offer a compelling risk/reward particularly in light of soft iPhone, PC, and App Store fundamentals over the next 6-12 months.”

Overvalued, or fairly valued?

In terms of valuation, Apple trades at 29 times UBS’s next twelve months (NTM) EPS estimate, which is higher than the one, three, and five-year averages of 25x, 27x and 23x respectively.

Notably, this represents a ~50% premium relative to the S&P 500 – a ten-year high for the company.

UBS argues that, while Apple deserves a premium due to its market-leading position, share price expansion is unlikely given the company’s upcoming growth challenges.

The ongoing demand pressure for iPhones, despite positive trends in emerging markets, has also played a significant role in UBS’s revised outlook.

Tough markets

The US, China, and Europe, which represented approximately 70% of iPhone demand in the March quarter, have seen a decline in sales.

In fact, ‘sell-through’ – a term used to describe the percentage of units sold by retailers compared to the amount of inventory received – decreased by 7.5% year-on-year (YoY).

While India, a market of particular interest to Apple, did see a 34% YoY increase in iPhone sales, UBS still asserts that growth outside of the three largest markets is insufficient to sustain long-term iPhone growth above mid-single digits.

What’s the outlook?

Further data from UBS’s second-quarter Smartphones Survey indicates a softening in the 12-month forward purchase intent for iPhones compared to six months ago, contributing to the firm’s downgrade of the tech giant’s shares.

Apple stock was trading 0.4% lower on Tuesday afternoon at US$183.06 in New York.

–Updates with additional broker comment, share price movement–


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