Apple (AAPL) is in focus this morning after shares of the technology giant were downgraded, with an analyst saying upside from the launch of iPhone 8 is already reflected in the shares. The analyst recommended clients use proceeds from sales of Apple shares to buy Alphabet (GOOG, GOOGL). The rare downgrade comes ahead of Apple's WWDC presentation this afternoon. 

UPSIDE ALREADY REFLECTED: Pacific Crest analyst Andy Hargreaves downgraded Apple to Sector Weight from Overweight, telling clients that upside from the launch of the iPhone 8 is already reflected in shares. Hargreaves said that investors already anticipate an "extremely strong" iPhone 8 cycle, with unit growth in the mid-to high-teens, while little weight is being given to risks surrounding gross margins, supply issues, "elasticity" or the likelihood for declines beyond the iPhone 8 cycle. Hargreaves pointed out that investors are anticipating expanded gross margins to drive earnings per share toward $12, which would require "strong" growth in sales to new users and "extremely strong" replacement volume, which he said is "unlikely." The analyst also said he expects declines in sales to new users and lower replacement volume to drive sales of iPhone lower in fiscal 2019, which is likely to drive EPS and revenue down for that year. He said that he is shifting iPhone units into FY18 from FY17, as recent supply checks have suggested the OLED iPhone 8 will be delayed until October and then have "limited" initial supply. While Hargreaves continues to see the potential for a tax repatriation holiday to serve as a positive catalyst for Apple, this is offset by the "uncertainty" of tax reform and that he believes the stock is fully valued in a "static" tax environment. Hargreaves also recommended investors use proceeds from sales of Apple shares to buy Alphabet, as he believes it "retains an excellent risk/reward profile and more substantial upside potential" than Apple.

WHAT'S NOTABLE: The downgrade comes as Apple kicks off its Worldwide Developers Conference, or WWDC, this afternoon in San Jose. The tech giant traditionally announces software updates around iOS, macOS, watchOS and tvOS at the event. Apple is also expected to announce a major hardware refresh for MacBooks and iPads and unveil a new Siri-powered speaker, which could compete with Amazon's (AMZN) "Alexa" line of home devices. According to a recent report, the Siri speaker will be powered by a custom ARM processor "equal in power to at least the A8 CPU on the iPhone 6 or newer, and have the W1 Bluetooth chip as well." Additionally, Apple is likely to announce plans to refresh its MacBook, and new models reportedly may come with Intel (INTC) "Kaby Lake" processors.

PRICE ACTION: Apple is down 1% to $153.85 in morning trading, though shares are up nearly 33% year-to-date.