Apple stock has fallen in recent months and even the bulls are getting worried. At its coming fourth-quarter-earnings report, the iPhone maker needs to show it can make progress on several major concerns, according to Melius Research analyst Ben Reitzes.
Reitzes has a $240 target price and a Buy rating on Apple stock (ticker: AAPL). That makes him one of the most bullish analysts on Wall Street, as the average target price on Apple stock is around $200, according to a FactSet poll.
However, with Apple stock hovering around $179—it has fallen 0.3% to $178.40 at 9:38 a.m. Tuesday—and down 5% in the last three months, the heat is on to justify its premium valuation. There are four major issues facing Apple, according to Reitzes.
Growth
Apple is set for a fourth straight quarter of declining revenue when it reports earnings in November. However, what matters will be guidance for the December quarter, and whether Apple can give a firm timeline for its return to growth.
Apple has an uphill task in delivering growth for the December quarter as it faces headwinds due to a strong dollar, and the period being one week shorter than the year-ago quarter, according to Reitzes. However, he still forecasts 4% revenue growth.
“As we move through FY24, we believe revenue can benefit from ongoing upgrades to the iPhone 15, increased store traffic due to the launch of the Vision Pro and iPad and Mac upgrades,” the analyst wrote.
Apple didn’t immediately respond to a request for comment on Reitzes’ report.
China
At around 20% of revenue, China is both a problem and an opportunity for Apple. The company needs to outline its strategy for the iPhone, app store, and supply chain in the country, according to Reitzes.
The headline risks of the Chinese government cracking down on iPhone use by government officials and competition from Huawei’s latest smartphone are probably overblown, the analyst wrote. However, stricter controls on foreign applications on iPhones in China might pose a bigger threat.
“If China’s government succeeds in denying Apple phones the ability to download western apps, the differentiation of the iPhone in the region may be damaged long term,” Reitzes wrote.
Apple will need to negotiate such Chinese government demand while also showing it can diversify its supply chain away from China without incurring additional costs.
AI
So far Apple has largely stayed away from the hype around artificial-intelligence technology. However, that might have to change as investors look for growth drivers.
Barron’s has already written about the company’s need for a clear strategy on generative AI, and the potential for an overhaul of its digital assistant Siri. Reitzes is also looking for a more powerful Siri and other generative AI products to help reinvigorate demand for iPhones and other Apple devices.
“Within two years we believe investors will be able to see how AI drives an upgrade cycle for iOS devices and new services from Apple,” he wrote.
However, that could mean more direct competition with Microsoft (MSFT) and Google-parent Alphabet (GOOGL), which leads into the final issue.
Search
Google’s antitrust trial has put more of a focus on the annual payments it makes to Apple to be the default search engine on iPhones and the Safari web browser. That has led to speculation the agreement could be struck down by the courts, costing Apple between $18 billion and $20 billion a year from Google.
“If payments and profit-sharing were to cease, it could hit Apple’s gross margins by hundreds of basis points,” Reitzes wrote.
That leaves the question of how Apple should respond. One option is for the company to launch its own search engine. However, Reitzes contends that would be chasing the past.
“We’d prefer Apple focus on innovative Generative AI services, which could provide a major lift,” he wrote.