Apple (AAPL) was snubbed by investment firm Jefferies (JEF) late Sunday. Jefferies analyst Edison Lee downgraded Apple stock from Buy to Hold, citing concerns over inflated expectations for its new AI-enabled iPhones.

Lee said smartphone hardware is not yet advanced enough to accommodate the kind of high-tech artificial intelligence analysts and iPhone consumers are hoping for.

“Near-term expectations for iPhone 16 and even 17 are too high," Lee wrote in a note to investors Sunday night.

Big Tech companies have raced to innovate generative artificial intelligence technologies and secure their footing in an AI-dominated market. Up until this summer, Wall Street worried if Apple could catch up to rivals such as Google (GOOG) and Microsoft (MSFT), which rushed to release new AI chatbots and chips, while Apple CEO Tim Cook remained elusive about the iPhone maker's AI plans. Now that Apple set into motion its AI vision with the upcoming release of Apple Intelligence, its next hurdle — like its competitors — is proving that it can monetize those artificial intelligence plans.

Apple stock fell 2.3% Monday.

“Unlike AI servers, smartphones lack high-speed memory and advanced packaging tech that allow fast data transfer between AP and memory, thus limiting their AI capabilities,” Lee said, adding, “To expect an accelerated smartphone replacement cycle now due to AI is premature, in our view.”

Lee said that it will take two to three more years for manufacturers like Apple to create smartphone hardware that's capable of running artificial intelligence software smoothly.

Apple unveiled its suite of artificial intelligence tools, called Apple Intelligence, at its Worldwide Developer Conference in June. Apple’s long-awaited AI debut, in addition to its reveal of a partnership with OpenAI, boosted the stock to record highs. It more than alleviated investor concerns over Apple’s barrage of bad news earlier in the year — from struggling iPhone sales and layoffs to clashes with antitrust regulators at home and abroad. Bank of America (BAC) analyst Wamsi Mohan predicted a future in which Apple’s AI-enabled “intelliphones” dominate the market.

But Apple’s initial launch of its iPhone 16, equipped with hardware to run its Apple Intelligence features that begin rolling out this month, has so far disappointed Wall Street. Analysts say demand for Apple’s latest smartphone is weaker than it was after past iPhone launches, citing shipping times as a metric. While both new and existing Apple customers are looking to buy the iPhone 16 for its faster connectivity, fewer cited Apple’s upcoming AI features as a motivating factor, according to JPMorgan's (JPM) most recent consumer survey.

To be sure, Lee said Apple is well positioned to lead the AI smartphone market in the future. Lee said Apple “is the only hardware-software integrated player that can leverage proprietary data to offer low-cost, personalized AI services.”

“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.”

Some 65% of Wall Street analysts covering Apple recommend buying the stock and see shares rising around 9% to nearly $245 over the next 12 months. Lee expects the stock to drop about 6% to $213.

Laura Bratton is a reporter for Yahoo Finance.

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