Apple Inc. (NASDAQ: AAPL) has managed to remain one of the world’s top companies by market capitalization and one of the world’s most cherished brands. Apple’s iPhone is an absolute ecosystem that overlaps with users’ lives at work, at home and on the road and even on vacation. Whether it’s a Mac or an iPad, or even the Watch, Apple has more than a $3.3 trillion valuation to support just how dominant the company is.

And now we have the iPhone all set and primed to roll out with artificial intelligence. Just one problem — the iPhone 16 may have more A than I in artificial intelligence.

A rare pre-earnings downgrade was issued by Jefferies on October 7, with analyst Edison Lee downgrading Apple shares to Hold from Buy. This downgrade does come with a caveat that is seen from time to time despite the formal rating being cut as Jefferies’ new price target is very specific at $212.92, which is higher than the prior $205 price target.

Tactical Bulls always reminds its readers that no single analyst call should ever act as the sole catalyst to buy or sell a stock. This downgrade is less positive than the consensus ratings would indicate, and it does not forecast all that much downside risk similar to what “Sell” ratings would detail. Because of Apple’s giant nominal valuation this downgrade helped trim close to $75 billion off of Apple’s market capitalization.

Lee believes that the near-term expectations are overblown. His primary concern is that Apple Intelligence isn’t expected to meaningfully lift iPhone sales even as the intelligence is set to roll out. He noted:

A lack of material new featured and limited AI coverage mean high market expectations are unlikely to be met.

All of this adds up to weaker demand than initially expected. The analyst downgrade also warns that Apple’s equity valuation in P/E terms is near a high. As of Friday’s close, Apple was valued at 34-times 2024 consensus earnings and about 30.5-times expected 2025 earnings. That is with expectations of 9% revenue growth this year $390 billion) and 8% revenue growth (to $421.6 billion) next year.

Lee is not predicting that AI is a bust. He is also not predicting that Apple will fail on AI. His downgrade suggests that it is going to take longer for the market to rapidly start buying up phones with more AI features. And for a potential new revenue stream, Lee even expects that Apple could begin charging $5 per month in a couple of years for Apple Intelligence to customers outside of China.

While the report is not endlessly focused on Alphabet Inc. (NASDAQ: GOOGL), analysts have cited strong competition when it comes to AI. Some of the Google smartphones are already showing AI features and many analysts who are not “Apple Only, and Apple Forever!” cheerleaders have also indicated that the Android phones have a jump on Apple. Still, it is important to understand just how difficult it is to switch out from one operating system to another now.

While BofA still has a favorable rating, just last month the firm warned of a softer iPhone 16 cycle in the lower-end models but stronger demand on the Pro models. As far as how Jefferies downgrade looks against peers, more than 85% of the coverage universe has a buy or equivalent rating on Apple shares. Here are some of the calls made within the last month:

• 10/3 BofA reit. Buy with $256 target.
• 10/1 Barclays reit. Underweight with $186 target.
• 9/24 Needham reit. Buy with $260 target.
• 9/16 Evercore ISI reit. Buy $with $250 target.
• 9/10 JPMorgan reit. Overweight with $265 target.
• 9/10 Oppenheimer reit. Outperform with $250 target.
• 9/10 Wedbush reit. Outperform and target to $300 from $285.
• 9/10 Morgan Stanley reitr. Overweight with $273 target.

The market did have some headwinds that may have contributed to Apple’s stock price drop. It closed down 2.25% at $221.69 on Monday, with a 52-week range of $164.07 to $237.23. FinViz shows a consensus analyst target price of $244.88, above the current share price versus the Jefferies target that is about $9.00 under Apple’s current share price. Apple shares are still up about 15% YTD and up almost 27% over the last year.