Apple’s Record Quarter Ran Into A Memory Bill

Revenue, iPhone, and Mac all set June quarter records; what sent the stock down was the September quarter guide and an open-ended memory cost.

Apple (AAPL) Fell Alone While MSFT, GOOGL And AMZN Rallied

Apple closed Friday at $308.91, down 7.4% from the prior session’s $333.43. The market did not go with it: over the same session the S&P 500 added 0.7%, MSFT rose 3.0%, GOOGL 6.7%, and AMZN 15.3%. The results released the evening before were not the trouble. June quarter revenue was $109.4 billion, up 16% year over year and a record for the period, with iPhone at $54.3 billion, up 22%, and Mac at $10.4 billion, up 29%, each a June quarter record. Diluted earnings per share of $2.02 rose 29%. Sales and profits beat Wall Street expectations.

So Why Did A Beat Take The Stock Down 7.4%?

Because of what came with it. Management guided September quarter revenue growth of 9% to 11% year over year, against the 16% just delivered, and named two causes: a sequential foreign exchange headwind of about two and a half percentage points to the year-over-year growth rate, and supply constraints it expects to increase significantly, hitting iPhone, Mac and iPad. A beat you have already banked is worth less than a guide you have to live with. The shortage behind that guide, though, is not what it looks like.

The Shortage Comes From Selling Too Much, Not Too Little

By the company’s own account this is not a regular supply issue but a demand forecast miss: iPhone and Mac are selling remarkably better than Apple planned for, and the supply chain, held back by the availability of the advanced chip nodes its processors are built on, has less flexibility than normal. Management says it has been pulling supply forward and that there is a limit to how far that goes. So the ceiling on the September quarter is what Apple can build, and management still expects high levels of demand.

If Demand Is Fine, Why Is Gross Margin Guided Lower?

Because the cost of memory keeps climbing. The June quarter printed a 50% gross margin, but about two percentage points of that came from tariff refunds, and the September quarter guidance of 47% to 48% still carries roughly one point of the same benefit. Strip the refunds out of both and the step down is 160 basis points, which management says memory costs more than fully explain, with currency a minor factor in that margin change. Apple paid more for memory in the March quarter than in the December quarter, significantly more again in the June quarter, and expects to pay more still in the September quarter. Management sees market pricing continuing to rise beyond the September quarter. Apple has already raised prices on iPad and Mac. Management calls it a “100-year flood on the memory pricing.”

Is The Memory Squeeze A Reason To Sell Apple?

Probably not on this evidence, but it changes what you are underwriting. Trailing twelve month revenue of $466.82 billion is growing 14.2%, well above its 6.9% three-year average, and net margin of 28% sits at its own three-year peak. Even after Friday’s drop, the stock sits about 9% below the $340.08 high it reached within the past year. What you own from here is a business whose sales look supply-capped rather than demand-soft, and whose margin now turns on a price Apple does not set. That price is set in a market management describes as having three main DRAM suppliers. Watch the actual gross margin against that 47% to 48% guide when the September quarter is reported, and before you act on the drop, size the move the market is already braced for.

A Cost You Cannot Forecast Should Not Decide Your Returns

Nothing above says Apple is broken. It says a company posting record June quarter iPhone and Mac revenue can still fall 7.4% in one session on a slower-growth guide and a price it does not set, in a memory market with only a few suppliers, on a timetable nobody can forecast. That is the case for owning a rules-based system rather than a single name, and it is what the Trefis High Quality portfolio is built to be. That portfolio has a track record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.