Needham analysts say the stock looks pricey, while Apple faces growing threats from its tech rivals

Apple’s stock was downgraded to hold from buy by Needham & Company analysts on Wednesday.

Apple Inc.’s stock has struggled to find positive momentum this year, and analysts at Needham & Company don’t see major catalysts ahead that can help put shares on a better course.

They downgraded the stock to hold from buy on Wednesday, citing concerns over the company’s near-term earnings potential, competition and a valuation they think is too pricey.

Currently, shares of the tech giant are trading at a price-to-earnings multiple of more than 26, which the analysts said “looks expensive” for several reasons. The valuation is toward the high end among Big Tech players, even as Apple sports slower revenue and margin growth than its peers, the analysts noted.

Alphabet Inc., Amazon.com Inc., and Meta Platforms Inc., which the analysts also cover, showed two-to-three times faster revenue growth, and three-to-12 times faster margin expansion in the March quarter compared with Apple, they said, “suggesting that [Apple’s] premium valuation vs Big Tech peers is at risk.”

While Apple has long seen its closed-off ecosystem as a strength, keeping loyal customers locked in to the company’s products and services, the Needham team questions whether the company is doing enough to defend its turf. The analysts noted that Apple is spending less on capital expenditures than its rivals, and “still lacks a competitive [large language model] or a developer ecosystem around [generative artificial intelligence] capabilities.”

Meanwhile, companies like Meta and Alphabet are investing in smart glasses, which could pose a challenge to smartphones in the long run, the analysts said.

The analysts said Apple faces increasing “threats to its iPhone and services revenue streams,” and could see revenue and margin estimates move lower in the next year as Wall Street comes to terms with a number of concerns.

For one, the global smartphone market is seeing slowing demand. In May, the International Data Corporation lowered its smartphone shipment growth forecast for the year from 2.3% to 0.6%, due to tariff-related pressures and sluggish growth in consumer spending.

Needham also flagged the U.S. Justice Department’s antitrust lawsuit against Google, which pays Apple about $20 billion per year to be the default search engine on its native Safari. The case puts Apple’s revenue growth at risk, as the analysts don’t see Apple replacing that full revenue amount with a different deal if a judge takes issue with the Google arrangement.

Apple is also facing a threat from President Donald Trump of a 25% tariff on iPhones sold in the U.S. that are not manufactured stateside. The proposed tariff “has heightened concerns about Apple’s reliance on Chinese manufacturing,” the analysts said, adding that they estimate 85% of iPhones are being manufactured there. 

The analysts calculated that the 25% tariffs could cut Apple’s earnings per share by 80 cents in the next 12 months if the company eats the higher costs instead of raising prices. Additionally, Apple has seen a decline in iPhone sales in China in the past six quarters, which also led the analysts to lower estimates.

Needham said an iPhone replacement cycle could be a catalyst for Apple’s shares because the product makes up nearly half of the company’s total annual revenue. However, reported features on the iPhone 17, which will launch in September, “are not big enough” to drive consumers to upgrade aggressively, the analysts said.

While Apple shares recently changed hands near $205, the Needham team sees $170 to $180 as a better entry point for investors.

And if Apple starts pursuing more advertising sales to create another revenue stream, the Needham team would be more confident in the company’s ability to grow revenue and margin. The analysts noted estimates from GroupM pegging the global market for digital advertising at $840 billion, “so it’s large enough to matter” to Apple.

Apple shares are down about 19% so far this year.