Apple Warns Margins Will Keep Falling; Shares Drop 4%

Summary

• Apple projected weaker gross margins and slower services growth, sending shares down as much as 4%.
• September-quarter revenue rose 12%, beating estimates, lifted mainly by across-the-board price increases.
• The guidance lands on John Ternus two months into his tenure as chief executive.

The latest

Apple told investors its closely watched gross profit margin will keep falling this quarter and its high-margin services business will keep slowing, guidance that fell short of Wall Street forecasts. The company held the projections for its earnings call, an hour after posting September-quarter results. Shares had been flat after the close before dropping as much as 4%.

Details

• The numbers: Apple said revenue grew 12% in the September quarter, slightly ahead of Wall Street expectations, with gross profit margin at 47.9%, also just above analyst estimates. The company attributed the growth largely to price increases imposed across its product line to offset higher costs.
• The cost squeeze: Chief Executive John Ternus and Chief Financial Officer Kevan Parekh said on the call that high memory costs are weighing more heavily on the company. Apple stockpiled cheaper components bought earlier, but those inventories are dwindling, removing a buffer that has shielded margins so far.
• The new CEO: Ternus became Apple's third chief executive in 29 years on Sept. 1, following Steve Jobs and Tim Cook. He inherits a company whose growth engine is wavering and whose valuation assumes it will not.
• The valuation: Oppenheimer analyst Martin Yang noted Apple trades at 36 times next year's expected earnings, a premium to the broader market, even though earnings are forecast to grow just 1% — slower than its tech peers. Yang wrote that he sees "insufficient upside to justify the premium."
• What analysts want: Yang said Apple needs to accelerate iPhone sales growth and turn around its slowing services business before he turns more bullish. He did not set a timeline for either.
• The services problem: Services, the reliable growth engine of the Cook era, is decelerating. Courts and regulators worldwide have limited Apple's ability to charge developers large fees to distribute apps through the App Store, the segment's biggest component.
• The OpenAI hit: The ChatGPT app has been one of Apple's most lucrative App Store fee generators. Around the time Apple accused OpenAI of trade-secret theft this past summer, OpenAI began redirecting potential subscribers to pay through its own website, bypassing Apple's commission.
• The AI gap: Apple's new Siri AI chatbot shipped during the quarter already trailing rivals, with agents such as Instinct and Muse able to complete multistep tasks while Siri handles basics like kitchen timers.
• The bright spot: The $1,999 foldable iPhone Duo is selling faster than Apple can supply it despite mixed reviews. Shipping dates slipped to January shortly after launch, an unusual stumble for a supply chain known for reliability.
• The stock ceiling: Apple's market value has repeatedly tested $5 trillion, trading above that level intraday six times before finally closing above it. The stock has since fallen back below the threshold.

Background

Investors have treated Apple as a refuge from the AI spending race, rewarding a capital-efficient business that returns cash through buybacks and dividends while rivals pour hundreds of billions into data centers.

Between the lines

The premium rests on a bet Apple can grow without the AI capital spending its rivals are absorbing. But the September quarter's growth came from raising prices, not from selling more, and the one product drawing genuine demand is a $1,999 device Apple cannot ship on time. If memory costs keep compressing margins and App Store fees keep eroding, the port-in-the-storm argument thins out.

What's next

Watch whether iPhone Duo shipping dates pull back from January, how far the gross margin falls against the 47.9% just reported, and whether App Store revenue absorbs further regulatory or developer-driven losses.

Source: The Wall Street Journal