Apple has exhausted its designs for the iPhone, and Jefferies has downgraded its rating to sell.

      Jefferies downgraded Apple from hold to underperform on Monday, which effectively acts as a sell rating for the bank. They also reduced their price target from $285.56 to $263.66. Sebastian Herrera from Fortune reported on this decision. The bank's supply-chain research revealed three reasons: Apple has scrapped a rumored all-glass iPhone, memory prices are rising sharply, and there has been minimal visible progress in AI.

      The cancellation of the rumored device is particularly significant. This phone was anticipated for release next year in celebration of the iPhone's 20th anniversary.

      Jefferies articulated their reasoning clearly, stating, “We believe this shows that introducing new form factors in the iPhone to drive higher [average selling price] is more difficult than expected.” The average selling price has been a key strategy for Apple over the last decade. A new design typically justifies a higher price tag, and without that new design, the strategy loses its effectiveness.

      The focus now shifts to the foldable iPhone, which Apple may unveil next month. Jefferies believes this model will be the company's sole margin driver, pushing their price estimate to $2,199 for the 256GB version and $3,099 for the 2TB version. These prices rival those of laptops, highlighting the necessity for margins to be sourced elsewhere.

      The rising cost of memory has also led Apple to increase prices for Macs and iPads, as AI data centers have been consuming the supply. Tim Cook concluded his last earnings call with a caution about a “hundred-year flood” affecting memory chip pricing. The majority of DRAM supply is concentrated among three firms: Micron, SK Hynix, and Samsung, a situation Cook has publicly criticized.

      Apple is actively seeking alternatives. The Wall Street Journal noted that it is testing memory chips from China's CXMT. However, purchasing Chinese memory chips in large quantities might face pushback from the White House.

      Currently, at least six firms have issued sell-equivalent ratings for Apple, matching the highest level since 2012, shortly after Steve Jobs passed away. Jefferies is not the first to downgrade Apple this summer; KeyBanc Capital Markets also rated it underweight in July, citing weak iPhone demand.

      Edison Lee, the Jefferies analyst behind this call, elaborated on Bloomberg Tech, stating that Apple is no longer the “king of the supply chain.”

      However, not everyone interprets the six sell ratings as a sign to sell. CNBC’s Investing Club provided a counterpoint, urging readers not to let a Wall Street downgrade deter them from holding onto the stock. Apple has also contested the critique regarding AI, with Cook portraying the company's on-device approach as a strategic advantage rather than a shortfall. “The ability to run some percentage of requests on-device is also very strategic, sort of a competitive weapon if you will,” he remarked.

      Investor patience has been waning, having already grown weary of Apple's AI commitments before this downgrade was announced.

      Next month, John Ternus will take over as CEO, succeeding Cook. Apple’s annual iPhone event is anticipated in early September, with the foldable iPhone expected to be introduced. Ternus will face dual challenges: improving margins and advancing product design, especially after a year of rebuilding the design team following several senior departures.

      Overall, Apple’s recent quarter performance was acceptable, but with a caveat. The guidance for July projected mid-teens percentage growth in iPhone sales for the current quarter. Given that iPhones represent about half of the business, this marks a slowdown from the 22% growth seen in the previous quarter, and Apple has indicated that gross margins will face pressure.

      Growth at this rate does not signify a crisis, and Jefferies is not contending it does. The debate is more nuanced than the headline suggests. If price increases must sustain the required margins, the maximum price Apple can charge becomes a crucial point in the investment argument. The only remaining new design option is the foldable model starting at $2,199, which places considerable pressure on a single device to uphold margin expectations.