Traders say the Apple Watch was a disappointment when Apple introduced it Tuesday along with two new iPhone 6 models and a payment system.
Pacific Crest Securities downgraded its view on Apple to "perform" from "outperform" Wednesday, citing stagnant iPhone growth and a "lack of compelling features" on the Apple Watch.
"We continue to believe Apple's strong customer loyalty will protect margins and cash flow, limiting downside in the shares," the investment bank said in a note. "Unless Apple Watch proves to be a surprisingly large mass-market hit, we believe multiple contraction will offset earnings growth over the next year and prevent significant stock appreciation."
The tech giant's shares hovered around the flatline in early trading Wednesday after a volatile session Tuesday following the event. (See how the stock is trading.)
Apple breaks into the field of wearable devices with a new smartwatch, which can check your heart rate and transmit digital payments.
The device will help users unlock doors at Starwood hotels next year, check in at airports and make phone calls. But it must be used in conjunction with an iPhone to be fully operational.
"It was looking good, but once they announced the watch had to be used along with the iPhone that changed the complexion of it," said Scott Redler, partner at T3Live.com. Redler said he traded Apple stock during the announcement and is currently long a call spread, but he does not have a position in the stock.
Redler said traders were watching for the release date of the new phones, and when it was announced that both would be available in September that was seen as a revenue positive boost for the stock.
"The stock took off and started to squeeze shorts, and it looked like the coast was clear … right around when the stock was trading at $102, the news hit that the watch would only basically work with an iPhone versus a standalone."
Apple's stock has had a mixed performance on days when it's made iPhone product announcements. Prior to the iPhone 6 announcement, the stock has risen an average 0.8 percent on iPhone product days but it has closed lower more often than higher.
Citigroup analysts, in a report earlier this week, said they expect the market for smartwatches to be $10 billion—and ultimately the market for wearable devices, including sport fitness bands, watches and apparel could be $30 billion.
They said in the note that the smartwatch market could benefit Apple earnings per share by 6 to 10 cents.
The price for Apple Watch starts at $349, and it will be available early next year.
"Will it really be a huge seller? That's the question. The watch is pretty narrow in its ownership and at that price point, it's not mass marketed on its own," said one trader.
—By CNBC's Patti Domm