Investing.com -- Shares in Apple (NASDAQ:AAPL) fell 1.5% in premarket trading Monday after Jefferies analysts cut their rating on the stock from Buy to Hold. The investment bank set a price target of $212.92 on Apple, suggesting a potential downside of around 6% from the last closing price.

The downgrade comes as Jefferies analysts raise concerns about the overestimated market expectations for the upcoming iPhone 16 and 17 models. More concretely, the tech giant’s heavy reliance on iPhone sales, which accounted for 52% of the company's revenue in fiscal year 2023, was highlighted as a key factor for the revision.

The analysts believe that the market's anticipation of 5%-10% unit growth for the new iPhone models is unrealistic due to a lack of significant new features and limited AI capabilities. Initial demand for the iPhone 16 is projected to be weaker than expected, with forecasts indicating flat volume growth for the second half of calendar year 2024 compared to the iPhone 15, and only a 2.5% growth in lifecycle volume for the iPhone 16.

The report also casts doubt on the near-term impact of AI technology in smartphones, suggesting that AI-capable smartphone technology is “likely 2-3 years away.” The current limitations in high-speed memory and advanced packaging technology in smartphones restrict their AI capabilities.

“To expect an accelerated smartphone replacement cycle now due to AI is premature, in our view,” Jefferies analysts wrote.

However, Apple is expected to introduce a new, thinner iPhone model, dubbed the "17 Air," in 2025, which could stimulate upgrade demand.

Jefferies remains bullish about Apple's long-term AI capabilities, acknowledging the company as “the only hardware-software integrated smartphone player.”

By the fourth quarter of fiscal year 2026, Apple is estimated to have 490 million AI-capable iPhones in use, with the number potentially rising to 845 million by fiscal year 2027. Apple's OpenELM model and another language learning model, Ferret-UI, are expected to reinforce its leadership in mobile AI technology.

“We believe AAPL is the leader in mobile AI tech, and its chip-OS-AI integrated ecosystem puts it far ahead of the fragmented Android competition,” analysts noted.

The investment firm also highlights Apple's strategic partnership with Taiwan Semiconductor Manufacturing (NYSE:TSM), which gives Apple a long-term technological and cost advantage. This collaboration is anticipated to help Apple expedite the commercialization of AI-enabling technologies and secure lower costs for advanced nodes in comparison to its competitors.

On valuation, Jefferies notes that while Apple's stock appears elevated in the near term, especially with fiscal year 2024 earnings projections falling below consensus, there is potential for long-term upside driven by AI-related fee income.

Apple's fiscal year 2026 earnings are expected to surpass consensus, and the firm's upside valuation is based on the possibility of Apple charging a monthly fee for AI services, with a target of $306.99.

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