Analyst Highlights 'Urgent Risks' and Threats to Apple (AAPL) Fundamentals

Laura Martin, Needham and Company senior internet and media analyst, recently explained on CNBC the rationale behind her downgrade of Apple Inc (NASDAQ:AAPL) stock that created a lot of buzz on Wall Street. Threats to iPhone sales and valuation are the two main concerns the analyst cited for the rating action:

“Let's go to the urgent risks. Urgent risks are super highly valued, 26 percent four times forward earnings on a consensus. Our earnings are below that on a PE basis, but that's twice its historical trading PE, and it's a nice big premium to the average S&P PE. And it's traded at a premium to some of its big tech competitors, which are growing two to three times faster. So we don't get that. We prefer Google and Amazon to this name on relative valuation.

Second, there are a lot of threats to its fundamentals. We take numbers down just on China iPhone threats, and in that we're about one or two percent below on both earnings and revenue growth. But anything that hurts that iPhone installed base replacement is problematic, because really this is a company that everything falls out of the iPhone. Not only is it 50 percent of sales, but services revenue, which drives margins, comes because you have iPhone sales.”

Apple Inc (NASDAQ:AAPL) is desperately in need of new catalysts. The company's revenue in China fell 8% in fiscal year 2024, following a 2% decline the previous year. The Chinese market accounts for about 15% of Apple's total revenue, so this downtrend cannot be ignored. Investors had hopes from the Wearables, Home, and Accessories segment, but so far, its performance has been weak. Vision Pro faces tough competition from Meta's $500 Quest and the more affordable Quest 3S, making it hard to justify its $3,500 price tag. The failure of Apple’s HomePod, unable to compete with Amazon’s and Google’s lower-priced offerings, further highlights the challenges in this market. Apple's iPhone 16 has not shown promising growth prospects yet, and investors are still in a wait-and-see mode on the AI platform.

Sands Capital Select Growth Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q1 2025 investor letter:

“We exited Apple Inc. (NASDAQ:AAPL) in March to fund what we view as compelling additions to existing holdings during the market selloff and to strengthen our cash position for future opportunities. Apple’s inclusion in Select Growth was intended to provide stability to the portfolio. However, in the current market environment, we see greater upside potential in other businesses and view cash as a more effective tool for downside protection and opportunistic deployment. We remain positive on the potential for shorter replacement cycles for computers and mobile devices driven by Apple Intelligence. That said, the delayed rollout of AI features—and Apple’s acknowledgment that some may be indefinitely postponed—could limit its ability to exceed earnings expectations. Apple remains a leading global technology business with a vast hardware and software ecosystem, strong customer lock-in, and powerful network effects. We will continue to monitor its progress and its potential fit within the Select Growth portfolio.”

While we acknowledge the potential of AAPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an extremely cheap AI stock that is also a major beneficiary of Trump tariffs and onshoring, see our free report on the best short-term AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.

Disclosure: None. This article is originally published at Insider Monkey.