Apple Stock Fell After a Record iPhone Quarter. Here’s the Margin Problem Investors Shouldn’t Ignore.

Apple (AAPL -2.25%) just delivered the biggest September quarter in its history, with revenue jumping 12% to $114.5 billion. Its iPhone business performed even better, and earnings per share topped Wall Street’s expectations.

So why did Apple stock fall about 2% on Tuesday?

The answer has less to do with how many iPhones Apple is selling and more to do with how much money it’s making on each one. Rising memory chip prices are putting pressure on Apple’s profit margins, and management doesn’t expect relief anytime soon.

I’m still bullish on Apple, but investors shouldn’t dismiss this problem.

Image source: Getty Images.

Apple’s iPhone business is firing on all cylinders

Apple’s iPhone revenue jumped 17.5% year over year to $57.6 billion, beating Wall Street’s estimate of $56.5 billion. That’s an outstanding result for a product line that already generates more than $200 billion in annual sales.

Not everything went Apple’s way. Its iPad revenue declined 10%, while wearables revenue fell 8%. Management attributed those declines partly to difficult comparisons with last year’s product launches and to supply constraints affecting the iPad.

But the iPhone remains Apple’s biggest business, and its performance suggests consumers are still willing to pay a premium for the company’s flagship products. The problem is that Apple is paying more to make them.

Memory prices are eating into Apple’s margins

Apple reported a gross margin of 47.9% for its fiscal fourth quarter of 2026 (ending Sept. 26), although that figure benefited from roughly 1 percentage point of tariff refunds. Without those refunds, its gross margin would have been approximately 46.9%.

For the December quarter, management expects gross margins between 45% and 46%.

That might not sound like much of a difference. But every percentage point of gross margin on $114.5 billion in revenue represents roughly $1.1 billion in gross profit. And Apple expects its December quarter to be even bigger.

The culprit compressing margins is memory chips, which are becoming increasingly expensive as demand for artificial intelligence infrastructure puts pressure on supply. CEO John Ternus described memory pricing as “unprecedented,” while CFO Kevan Parekh said rising memory costs accounted for the entire underlying gross margin decline between the June and September quarters.

Apple has already raised prices on its iPhones, Macs, and iPads, but it’s also benefiting from memory purchased earlier at lower prices. As those inventories are depleted, higher costs will increasingly affect profitability.

And there’s another complication. Apple stock trades at roughly 35 times expected earnings, leaving less room for disappointing results.

$330.70-$7.62 (-2.25%)

NASDAQ · As of 1:06 PM ET 11/03/26

Why I’m still bullish on Apple

I don’t think rising memory prices fundamentally change Apple’s long-term investment thesis.

For starters, Apple’s services business carries a gross margin of approximately 76%, making it substantially more profitable than hardware sales. That business provides an important cushion against rising manufacturing costs, although management expects services revenue growth to slow to between 8% and 9% in the December quarter.

Apple also has the financial resources and purchasing power to secure memory supplies. Its manufacturing purchase obligations increased by $33 billion during the quarter, reflecting efforts to lock in future production.

That doesn’t eliminate the margin problem, and Apple’s Siri AI rollout will introduce additional costs. But memory prices are cyclical, and Apple has weathered component shortages and rising manufacturing expenses before. The bigger question is how much of those costs Apple can pass along to customers without hurting demand.

When Apple reports its Q1 2027 results, I’ll be watching whether gross margins land within management’s 45% to 46% forecast. I’ll also be paying attention to services growth and whether supply constraints affecting Macs and iPads begin to ease.

Apple’s iPhone business is performing exceptionally well, and I don’t see any reason to abandon my bullish outlook over one disappointing margin forecast.

But at 35 times expected earnings, Apple needs more than strong sales. It needs to demonstrate that it can keep those sales profitable, even as the cost of producing its products increases.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.