Apple has exhausted its supply of iPhone shapes, and Jefferies has just downgraded its rating to sell.

      Jefferies downgraded Apple from hold to underperform on Monday, which is akin to a sell rating. Additionally, it lowered its price target from $285.56 to $263.66. Sebastian Herrera from Fortune reported this development. The bank’s supply-chain analysis revealed three key factors: Apple has cancelled a speculated all-glass iPhone, memory prices are rising sharply, and there has been minimal visible advancement in AI.

      The cancellation of the phone is the critical issue. This device was anticipated for release next year to mark the iPhone's 20th anniversary. Jefferies articulated its 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.” For the past decade, Apple has relied on increasing the average selling price by introducing new designs. However, without the new design, that strategy falters.

      This situation leaves the foldable iPhone, which Apple might announce next month. Jefferies suggests it will be the company’s sole margin driver, estimating prices at $2,199 for the 256GB model and $3,099 for the 2TB version—pricing that aligns more with laptops than smartphones, indicating that margins must be sourced from somewhere.

      The rise in computer memory costs has been the reason behind Apple's price hikes on Macs and iPads, as AI data centers are consuming supply. Tim Cook ended his last earnings call with a warning regarding a significant surge in memory chip pricing, likening it to a "hundred-year flood." The supply of DRAM is predominantly controlled by three companies: Micron, SK Hynix, and Samsung, a situation Cook has openly criticized.

      Apple is seeking alternatives and is reportedly testing memory from China's CXMT. However, purchasing Chinese memory chips en masse could face opposition from the U.S. government.

      Currently, at least six firms are issuing sell-equivalent ratings on Apple, matching a previous high from 2012, shortly after Steve Jobs passed away. Jefferies is not the only bank to make this adjustment this summer; KeyBanc Capital Markets also downgraded Apple to underweight in July due to concerns over iPhone demand.

      Edison Lee, the Jefferies analyst responsible for the downgrade, expanded on this on Bloomberg Tech, suggesting that Apple is no longer the “king of the supply chain.”

      However, not everyone interprets the six sell ratings as a reason to sell. CNBC’s Investing Club published a counterargument the same afternoon, advising investors not to be deterred by Wall Street's downgrade.

      Apple also challenges the AI aspect of the argument, as Cook has positioned the company’s on-device approach as a strategic advantage rather than a disadvantage. “The ability to run some percentage of requests on-device is also very strategic, sort of a competitive weapon if you will,” he stated.

      Investors have shown dwindling patience, already growing skeptical of Apple's AI commitments prior to this downgrade.

      Next month, John Ternus will succeed Cook as CEO. Apple’s annual iPhone event is anticipated in early September, likely unveiling the foldable device. Ternus will face two pressing challenges: the margin issue and product development, as the company has been busy rebuilding its design team after significant senior departures.

      The latest quarter was satisfactory, which is key to note. Apple’s guidance for July predicted mid-teens percentage growth in iPhone sales this quarter, representing approximately half of the company's business. This figure indicates a slowdown from 22% growth in the previous quarter, and Apple cautioned about potential pressure on gross margins.

      While growth at this rate isn’t a crisis, Jefferies does not claim it to be. The discussion is more nuanced than the headline implies. If rising prices must compensate for margins, then the limit on what Apple can charge becomes central to the investment narrative. The only new design option is a foldable starting at $2,199, placing a substantial burden on a single device's sales.