by , 11:10 AM EDT, April 22nd, 2008

American Technology Research analyst Shaw Wu downgraded his "Buy" rating for Apple's stock to "Neutral" on Tuesday citing concerns over the company's high valuation, high investor expectations, and potential "product vacuum" before the third calendar quarter in 2008. His downgrade comes a day before Apple announces its second quarter earnings.

"We are downgrading our rating on AAPL shares to Neutral from Buy for four key reasons," Mr. Wu said. "This was a very tough decision as we have been bullish on Apple for the past several years, watching the stock more than triple."

According to Mr. Wu, the risk/reward for Apple's stock at its current levels in not compelling, and there is little potential for appreciation since it is within about four percent of his US$175 target price. He added "We see potential downside risk to $135 to $140 -- a correction of 15 to 20 percent."

Following Apple's 45 percent rebound over the past few weeks, Mr. Wu feels investors may be expecting too much from the Mac and iPod maker. "While we believe Apple will report a strong quarter relative to guidance and published consensus estimates, we are concerned whether it will be good enough and whether investors will be as forgiving with conservative guidance," he said.

While Mr. Wu is anticipating strong product roll outs in the second half of 2008, he is worried that there might be a lull leading up to the new launches. According to his supply chain checks, the 3G iPhone won't likely ship in volume until July, and new Macs won't appear until the September quarter, leaving the June quarter without much to show for new products.

Apple's stock also seems to be driven by investor focus on near-term investing, according to Mr. Wu. That volatility has left him reticent to recommend purchases at the stock's current levels.

"While we maintain our longer-term fundamental positive view on Apple, from a stock perspective, we find it difficult to recommend purchasing at current levels," he said. "The reality is that AAPL shares are very volatile and trading action suggests investor focus on near-term results. Arguably, shares should not have hit as low as $115 and as high as $168 in such a short period of seven weeks, but it has."

Mr. Wu is maintaining his $175 target price for Apple's stock. Apple is currently trading at $162.76, down 5.40 (3.21%).