Apple’s earnings reminded investors that the company is not immune to the challenges of the AI race.
Shares of Apple (AAPL) tumbled 7.35% on July 31, even after the company beat Wall Street‘s expectations for both earnings and revenue for the fiscal third quarter.
Apple reported adjusted earnings of $1.91 per share, topping estimates of $1.89, while revenue came in at $109.42 billion, ahead of the $108.65 billion consensus, CNBC reported.
iPhone revenue, its largest business, reached $54.25 billion, also beating expectations of $53.86 billion.
However, the company issued weak guidance, citing “supply constraints” as it navigates what CEO Tim Cook recently called a “hundred-year flood” in memory supply.
“We’re seeing some very significant constraints currently with limited flexibility in the supply chain to remedy it,” Cook said on the earnings call.
This was Cook’s last earnings call as CEO before handing leadership over to John Ternus, Apple’s current head of hardware.
What Apple’s supply constraints mean for the stock
Supply constraints are expected to weigh on iPhone, iPad, and Mac sales, with Apple guiding for 9% to 11% September-quarter revenue growth, below the 12%-plus FactSet consensus, MarketWatch reported. The company guided for 47% to 48% gross margin in the September quarter, down from roughly 50% in June.
Apple has already raised Mac and iPad prices, and many analysts expect iPhone price hikes this year.
Evercore ISI analyst Amit Daryanani said in a note that Apple’s guidance may be “conservative,” arguing the company could ease margin pressure by raising iPhone prices this fall with little impact on demand, helped by a new leasing program.
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Meanwhile, Apple is preparing to launch a redesigned Siri powered by Google technology alongside its new iPhone lineup in September, a key test as investors question its AI progress.
Even with the July 31 drop, Apple stock is up 13.63% year-to-date, making it the third-best performer among the Magnificent Seven, behind Amazon’s 17.66% gain and Alphabet’s 13.78% rally.
Morgan Stanley warns of supply, margin and Services headwinds
Morgan Stanley turned more cautious on Apple stock following the tech giant’s earnings, saying supply constraints, margin pressure, and slowing Services growth could weigh on the stock despite strong product demand.
The bank maintained its Overweight rating but lowered its price target to $360 from $364. It also kept a “Cautious” industry view, according to a recent research note sent to TheStreet.
“We’d expect some softness until new catalysts are nearer,” Morgan Stanley wrote, pointing to Apple’s iPhone launch event in September, the Siri AI rollout later this year, and potential regulatory approvals for its Intel acquisition in Europe and China.
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Analysts said June-quarter demand remained strong, but supply shortages are limiting September-quarter growth. They noted that rising memory costs are putting greater pressure on margins before expected iPhone price increases later this year.
“Product demand remains robust, but supply constraints are limiting September quarter growth, memory inflation pre-iPhone price hikes is causing more pronounced margin pressure, and Services is decelerating,” the firm wrote.
Morgan Stanley believes Apple could offset some of that pressure through expected iPhone price increases later this year and the launch of a foldable iPhone, though it questioned whether higher memory costs could delay a broader margin recovery into fiscal 2027.
The bank also pointed to Apple’s Services business as the “biggest blemish” from the quarter.
Services revenue grew 12% year over year, missing Wall Street estimates, while September-quarter guidance implies growth will slow to below 10%, hurt by foreign exchange, weaker mobile gaming and softer App Store trends.
Morgan Stanley said Apple made an unusually direct acknowledgment of App Store headwinds, including weaker gaming activity and changes to business models in some countries. While management remains optimistic about Siri AI and its long-term revenue potential, the firm said it is still too early to determine whether AI will become a meaningful growth driver.
“It’s not clear that AI is serving as any measurable tailwind to Products or Services,” Morgan Stanley wrote.
Still, Morgan Stanley said the bigger picture remains positive for Apple.
“Big picture, there remains a lot to be constructive on with the Apple story – the installed base continues to grow to all-time highs, FCF is growing 52% Y/Y YTD, the cadence of product launches is accelerating, new form factors are on the come, Siri AI is launching in a few months, and a new CEO is stepping into the helm,” the analysts wrote.
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