Apple shares fell Monday night as the iPhone maker reported better-than-expected quarterly results, but slower service revenue growth and higher memory costs weighed on profit margins. According to LSEG, Apple’s revenue for the fourth quarter of fiscal 2026 (ending Sept. 26) rose 12% to $114.48 billion, beating expectations of $113.39 billion. Earnings per share (EPS) rose 14% to $2.10, beating expectations of $1.99, LSEG said. The bottom line is that we still “own and don’t trade” Apple stock. Stock prices have been featured prominently in the papers since the beginning of the year. During October, when tech stocks were hurt by concerns about AI funding, Apple stood out, hitting new highs at the end of the month. Apple has emerged as a relative winner in the market as data center deals come under pressure. AAPL YTD Mountain Apple YTD stock has risen 25% year-to-date on Monday night, outperforming Amazon, Alphabet, Metaplatform and Microsoft (all holdings in the club). Hyperscalers are using up much of their free cash flow to fund AI investments, but with the exception of Microsoft, Apple continues to generate significantly positive FCF. This allowed Apple to repurchase $24 billion worth of stock in the quarter and $86 billion worth of stock in the past 12 months. The increase pushed the company’s valuation to more than 35 times expected EPS over the next 12 months, its highest level in recent memory. That meant the company needed to report a picture-perfect quarter with a strong outlook to avoid profit-taking. Unfortunately that didn’t happen. However, Apple’s quarterly results were strong, with sales and gross profit margins improving, and services remaining roughly flat. This number was enough to change the stock price for most of the evening. But after management provided guidance for the current quarter, the stock fell about 3% in after-hours trading as gross profit and service revenue growth fell short of street expectations. The company’s overall earnings outlook was better than expected. Apple has been weathering rising memory costs in recent quarters, and prices aren’t easing anytime soon. Memory costs in December are expected to be higher than in September, which increased from the June quarter. Memory costs are outside of management’s control and won’t stay this high forever, so we’re focused on how Apple overcomes this issue. One way to offset these higher costs is to raise prices, as we did for Macs and iPads in June and iPhones in September. Apple is also seeking to reduce the cost of non-memory components. What the company can control is the products and services it introduces, and the launch of the foldable iPhone Duo appears to have been a hit. The new form factor sold out quickly on launch day, indicating that there is not enough supply to meet demand. “iPhone Duo is limited as of today,” Apple COO Sabi Khan acknowledged during an earnings call. “Our efforts are progressing well and we are working hard to get this innovative new product into customers’ hands as quickly as possible. However, at this time it is very difficult to predict when supply and demand will balance.” Duo became available for pre-order on October 16th and will be in stores on October 23rd. As such, revenue from new devices was not included in the September quarter numbers. Reports of cracked Duo screens, which Apple had previously acknowledged, were not mentioned in the earnings call. The company said the issue is affecting a “small number” of devices and affected users “should contact AppleCare for a replacement.” From an AI perspective, CEO John Tarnas, in his first earnings call since replacing Tim Cook on September 1, emphasized the iPhone’s role as an “intelligent personal hub” and Siri AI’s ability to tap into the wealth of personal information stored on the device. “If you think about it, there’s so much personal data stored on your iPhone: contacts, communications, health data, financial data,” he explained. “Siri takes advantage of that and gives you access in a way that other people can’t, in a very secure and private way.” While memory costs remain a temporary challenge, we ended the quarter on a balanced note as Apple continues to gain more share than its competitors in the smartphone and PC markets. We slightly raise our price target to $360 per share from $340, but maintain a hold rating of 2 due to its historical performance and strong valuation. Quarterly Commentary Product sales increased $1.25 billion year-over-year to $82.9 billion, exceeding expectations of $82.26 billion. The better-than-expected results included a 17.5% increase in iPhone sales and a 24% increase in Mac sales. The Mac’s performance is remarkable considering Intel’s warning to the personal computer market last week. Wearables, Home & Accessories sales were down 8% year over year, but better than expected. iPad sales fell 10.4% year over year, falling below analysts’ expectations. Services revenue growth slowed quarter-over-quarter to just under 10% year-over-year. Revenue was $31.57 billion, slightly below expectations of $31.59 billion. However, the company remains optimistic about the future growth of its services business, thanks to its large installed base of more than 2.5 billion active devices that it can monetize. Companywide gross margin improved 70 basis points year-over-year to 47.9%, at the high end of management’s expectations. This beat the consensus estimate of 47.5%. This result included a 1 percentage point positive impact from duty rebates. Excluding customs duty refunds, gross margin would have been down 1 percentage point sequentially. This is primarily due to increased memory costs. Segmentally, product gross margin improved 100 basis points year over year to 37.2%, beating analyst expectations of 36.8%. Service profitability made up for some revenue shortfalls, and gross margin expanded 70 basis points year over year to 76%, beating analysts’ expectations of 75.1%. Regionally, Apple posted double-digit growth in every region except Japan, where sales declined by about 1%. Despite long-standing concerns about competition, the Greater China region achieved strong year-on-year growth of 21%. Apple also topped the consensus forecast in Greater China, Europe, and the rest of Asia-Pacific. The Americas and Japan were slight mistakes. Guidance Let’s take a closer look at Apple’s current quarterly guidance, the first quarter of the company’s 2027 fiscal year, the holiday quarter. Revenue in the December quarter is expected to rise 7% to 10% year-over-year, according to FactSet, beating the 5.8% growth the Street was expecting. This translates into a revenue guide of $155.98 billion versus the consensus of $152.12 billion. That was good news. The bad news is that revenue growth in high-margin services is expected to slow again. The company forecast service revenue growth of 8% to 9%, below street expectations of 10%. This is a guideline of $32.56 billion, compared to the consensus estimate of $33 billion. The high percentage of hardware sales (low profit margin) and the continued rise in memory prices are probably the reasons why the gross profit margin estimate was light. The company is guiding for gross margins between 45% and 46%, which is below the consensus estimate of 46.9%, and Apple also claimed higher inference costs related to Siri AI. (The Jim Cramer Charitable Trusts are long AAPL, AMZN, GOOGL, META, MSFT. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
