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Why Wall Street is cooling on Apple stock

The brightest light on Wall Street is dimmer at the start of 2024.

Apple (AAPL), the most valuable company on the market, has endured a bruising run in the first days of the new year. The iPhone maker, which commands about 7% of the weight of the S&P 500 (^GSPC) index, steering the fate of investor portfolios, drew two stock downgrades this week, pulling shares down more than 5% and raising concerns about weakening iPhone demand.

Barclays struck the first blow. Analysts there cut Apple's rating to Underweight and dropped their price target to $160, representing what was a roughly 17% stock price drop for the tech giant from last year.

"We rate Apple Under Weight as questions persist about the deterioration of iPhone upgrade demand with rising competition in the premium smartphone segment," the analysts wrote.

The follow-up punch landed Thursday, when analysts at Piper Sandler downgraded their rating on Apple's stock to Neutral from Overweight and sliced their price target by $15 to $205. Apple shares were trading hands at around $182 as of Thursday afternoon.

"We are concerned about handset inventories entering into 1H24 and also feel that growth rates have peaked for unit sales," said lead analyst Harsh Kumar in a note to clients. "Deteriorating macro environment in China could also weigh on handset business."

The percentage of analysts with a bullish rating on the stock is at a three-year low, according to Bloomberg data.

Apple CEO Tim Cook looks on following a conversation on mental health, during a spousal program on the last day of the Asia-Pacific Economic Cooperation (APEC) Leaders' Week at Apple Park in San Francisco, California, on November 17, 2023. (Photo by ANDREW CABALLERO-REYNOLDS / AFP) (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images)
Apple CEO Tim Cook and his leadership team have played up the growth of the company's services segment. (ANDREW CABALLERO-REYNOLDS / AFP) (ANDREW CABALLERO-REYNOLDS via Getty Images)

Apple's iPhone revenue sank about $5 billion in 2023 from the year prior. The flagship iPhone accounts for roughly half the company’s total revenue. Sales of Macs, iPads, and wearables also declined, as rising inflation and interest rates pressured consumers.

But bullish analysts focus on Apple's growing services businesses, which swelled from $78 billion in 2022 to $85 billion in 2023. In the most recent quarter revenue from services ballooned by almost 20% compared to the same period the year before. Apple's enormous user base and the strength of its services are a crucial component of more optimistic readings on the company's future. Wedbush analysts led by Dan Ives pin the value of Apple's services business as high as $1.6 trillion and predict that Cupertino will become the first $4 trillion company by the end of 2024.

Skeptical observers, however, see heightened risks even in Apple's most promising segment. Barclays noted that services might attract more regulatory scrutiny. Investigations into the app store could intensify, especially as other tech giants brace for a wave of significant antitrust rulings this year. How Big Tech figures into the US presidential election and how aggressively the next administration will pursue competition enforcement is another major factor for tech stocks.

Apple's lucrative agreement to use Google as the default search engine in its Safari browser, which is estimated to bring in billions of dollars to its services business, could also be under threat. Closing arguments for the Department of Justice's antitrust case against the search giant are scheduled for the spring.

Apple's dimming prospects among some analysts coincide with a stock performance that lags behind other members of the Magnificent Seven.

All the names in the elite, tech-centric group handily beat out the benchmark S&P 500 index. But Apple claimed the lowest position, rising roughly 50% in 2023. That’s nothing to sneeze at, but is notable compared to the staggering gains of Nvidia (NVDA) and Meta (META), up 239% and 194%, respectively, or even Microsoft's (MSFT) more modest 57% rise. The Nasdaq 100's (^NDX) increase of 54% managed to edge out Apple too.

Where much of the tech world and even players outside it have scrambled to get in on the AI hype — releasing products, announcing new ventures or simply reciting the words "AI" — Apple CEO Tim Cook has taken a more subtle approach. That too may have played a factor in the market's cooling reception.

In recent earnings calls, Cook has explained that AI is already integrated into the Apple consumer experience. It's just that the company doesn't call out the technologies explicitly, as if it were a marketing gimmick, but relies instead on weaving AI into its products and focusing on the customer benefit. In another rhetorical move that appeared to be gently critical of other tech leaders, Cook said the company tends to unveil new technologies when they are ready for users. And not before.

If there is a consumer tech company defined by how its products make users feel — for the vibes rather than the intricacies of its software, it's Apple. So not showboating about what's coming in the AI development cycle has its benefits.

But a more pessimistic interpretation is that as rivals like Microsoft and Meta lean into their large language models, framing generative AI as tech's next great frontier, Apple is getting left behind. And most of us already have phones.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.

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