Apple Earnings Are Next Week. Why This Analyst Says Be Cautious.

Apple reports third-quarter earnings on July 31. (Getty Images)

Apple’s lagging progress with artificial intelligence should give investors pause heading into earnings next week, Needham says.

Wall Street will be closely monitoring Apple’s earnings report on July 31 amid a challenging time for the stock. While the S&P 500 has risen 8.5% this year, Apple shares have dropped 14%.

There are several reasons for the stock’s decline this year. Apple makes most of its iPhones in China, and margins are now under pressure from President Donald Trump’s tariffs. The company is now looking to increase iPhone production outside of China, in countries like India, to avoid the worse of the import levies. CEO Tim Cook said on the last earnings call in May that the company was anticipating a $900 million increase in costs for its June quarter due to the tariff policies at that time.

There’s also concerns that iPhone demand will weaken if consumers choose to hold back on purchasing Apple products as tariffs drive goods price higher. That would be a major problem for the tech giant, which makes most of its revenue from iPhone sales. The smartphone accounted for $46.8 billion of Apple’s total $95.4 billion sales in the second quarter.

Needham analyst Laura Martin advised caution heading into earnings, highlighted another major risk that has led to downbeat investor sentiment: artificial intelligence.

“We do not believe that AAPL can remain on the sidelines, without a clearly articulated GenAI strategy and action plan,” Martin wrote in a research note Friday. She rates the stock as a Hold without a price target.

Apple didn’t immediately respond to a Barron’s request for comment.

Analysts were once incredibly optimistic that the company’s AI software—Apple Intelligence—would lead to an major iPhone upgrade cycle as customers were expected to flock to try the new tech. That has yet to come to fruition: Apple continues to delay its most highly anticipated AI updates, and what’s already available isn’t getting major attention from users.

“AAPL must articulate a GenAI action plan. AAPL is 1-2 years behind its Big Tech competitors,” Martin wrote.

Martin added that she does expect the company to make AI announcements on the earnings call to try to ease investor concerns. She believes Apple will raise its capital expenditure guidance to invest in data centers, servers, and networking equipment. She also says the company might announce a “multibillion-dollar/year license deal to have Anthropic or another proprietary LLM [large language model] build AAPL its own unique and private GenAI infrastructure.”

But announcements that are anything less than game-changing could be a problem for the stock, which is currently trading at 28 times earnings expected over the next 12 months. That’s above its five-year average of 27 times forward earnings, and the 22 times forward earnings valuation of the S&P 500.

Apple stock was up 0.2% to $214.27 on Friday.

Write to Angela Palumbo at angela.palumbo@dowjones.com