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JP Morgan trims Apple stock target to $215 over weak iPhone expectations

Apple CEO Tim Cook

Investment firm JP Morgan has cut its Apple price target by $10 following the company's earnings report that showed iPhone declining in China.

Overall, Apple's earnings report showed a bounce back from its 2023 dip, but the detail in the announcements has JP Morgan predicting future declines. The analysts were particularly unimpressed with how Apple tried to spin its earnings results by stressing multiple reasons that direct year on year comparisons could not be done.

"Apple looked to explain the F2Q revenue outlook for a roughly -5% decline y/y through the tougher compares on account of the iPhone supply fill-in during F2Q last year," wrote JP Morgan in a note seen by AppleInsider, "excluding which revenues are expected to track flat y/y despite a tough macro backdrop."

"However, putting aside the comparables, the key driver of the weaker outlook for the company in F2Q relative to expectations, which has more reaching consequences to the outlook beyond F2Q, is primarily the headwinds to Macs, iPad, and Wearables," it continues.

JP Morgan says that "the outlook for iPhone revenues to decline by about -10% y/y" and Services only expanded by "low double-digit percentage."

"[But] the headwinds to iPad, Mac and Wearables, which in aggregate declined y/y in F1Q and are expected to decline materially again in F2Q," said the analysts, are driving the primary variance in relation to the macro impact on the Product categories and with more far reaching consequences in relation to the revision of our revenue forecasts beyond F2Q."

JP Morgan notes that according to Apple, iPhone sales in China declined in "only mid-single digits," but the earnings report's figures say overall revenues declined around 11% year on year in the country.

This implies "a much stronger decline in the rest of the Product categories," say the analysts, "challenging the outlook for the company in the region in the medium-term."

"The greater revenue challenges are leading us to now forecast a modest revenue decline for FY24E, reversing our prior expectations of modest growth," continued JP Morgan.

Predicted iPhone shipments (Source: JP Morgan)
Predicted iPhone shipments (Source: JP Morgan)

At the same time, however, JP Morgan notes that "Apple continued to surprise investors with margin delivery, with aggregate margins tracking to 45.9% in F1Q - at the high-end of the guided 45%-46% range, and is now guiding to gross margins higher than 46% (guidance range of 46%-47%), which will be a new record for the company."

The analysts also expect that Apple's gross margins will continue to expand because of this margin, plus "the higher revenue mix of Services."

Consequently, JP Morgan says that the "iPhone still showcases resilience, even though in revenue," but says it's the "outlook for iPad and Macs raises broader concerns."

"While iPhones contribute a large majority of Product revenues for the company, and minor variances even in relation to comparables drive a significant variance in the financials," it says, "we believe the bigger concerns from the EPS print will be demand for the other Hardware product categories."

JP Morgan expects Apple to "still track about ~$2 bn and ~$4 bn higher in FY24 over FY19 levels in relation to revenues in Macs and iPads respectively." It notes that this leaves "room for a return to pre-pandemic levels of demand/revenue."

The report does not include any predictions specifically concerning the Apple Vision Pro, whose first sales figures will feature in the next quarterly earnings report. Separately, JP Morgan has cautioned investors not to read too much into how the Apple Vision Pro sold out quickly.