Apple is getting punished for the one thing it did not deliver this quarter
Apple on Thursday evening delivered solid quarterly numbers on many of the things Wall Street was concerned about — from better-than-expected iPhone sales to better-than-feared results in China. However, a small miss on services revenue was disappointing and knocked the stock down in after-hours trading. Revenue in Apple’s fiscal 2025 second quarter, which ended in March, rose 5% year over year to $95.4 billion versus the $94.7 billion estimated by LSEG. Earnings per share increased by 8% in the quarter to $1.65 versus the $1.63 estimated by LSEG. AAPL YTD mountain Apple YTD Bottom line Apple almost nailed it. If not for the services miss — and we’re talking about a very small miss; $26.65 billion reported versus the $26.7 billion — we would likely be seeing a different reaction in the stock, which dropped roughly 4% after the print. It should be said that services sales did grow 11.6% to $26.65 billion, a number that would be the envy at any other company. The services division includes iCloud subscriptions, services like Apple Music and Apple TV+, warranties and revenue from search licensing deals. While China revenue of $16 billion was also light, Apple CEO Tim Cook on the post-earnings conference call pointed to a survey that showed iPhones were the top-selling device in urban China. This should ease some concerns that U.S.-China tensions would stoke increased nationalism among Chinese consumers and hurt sales. Cook said that assuming current tariff levels, only $900 million in added costs are expected in the June quarter. He did refuse to go beyond that. He said there was minimal tariff impact in the March quarter and saw no evidence of “pull forward” in the March quarter sales because of tariffs, suggesting the positive iPhone demand was achieved on its own merit rather than people moving up their purchases to avoid tariffs. Most of Apple’s products are currently exempt under President Donald Trump ‘s decision to temporarily pause tariffs on electronics, including smartphones and computers. However, that exemption did not include the 20% tariff the U.S. put on China related to fentanyl trafficking. On the call, Cook also said the majority of iPhones sold in the U.S. in the June quarter will be shipped from India, and other devices such as AirPods, Macs, and watches sold in the U.S. will come from Vietnam. He added that product from China will be used to supply the rest of the world. Apple has been scrambling to move its iPhone supply chain from China to India to minimize its tariff exposure. Cook talked about Apple’s planned $500 billion investment in the U.S. over the next four years, saying teams and facilities will expand in states including Michigan, Texas, and California. He referenced Apple semiconductor production at Taiwan Semiconductor Manufacturing ‘s plant in Arizona. “We expect to source more than 19 billion chips from a dozen states, including tens of millions of advanced chips being made in Arizona this year. We also sourced glass used in iPhone from an American company. All told, we have more than 9,000 suppliers in the U.S. across all 50 states,” he said. On the call, Cook said that iPhone 16 sales in the March quarter were strong in regions where Apple Intelligence AI features were available. There were concerns going into the release about iPhone sales, which actually increased 2% to $46.84 billion and exceeded estimates by roughly $1 billion. Apple Intelligence was announced at last year’s Worldwide Developers Conference, and it has been rolled out on a staggered basis. Cook said the company has delivered a lot of what was promised, but did touch on the decision to delay the supercharged version of Siri. He added that more time is needed for the more personalized digital assistant to meet Apple’s quality bar, and that while progress is being made, it’s talking longer than the company had previously thought. We’re reiterating our 2 rating but reducing our price target to $245 per share from $280 to reflect the difficult operating environment. For that reason, we trimmed our Apple position on April 21. Jim Cramer first wrote in his April 13 column that investors should sell some Apple shares. However, due to our trading restrictions — Jim mentioned the stock on television — we had to wait more than a week to make our move for the Club. Outlook While Apple doesn’t provide formal guidance, management said the June quarter is expected to grow in a range of low-single digits to mid-single digits on a percentage basis. Growth of 4% was expected. Apple reported $85.78 billion in sales during last year’s June quarter. Gross margin for this year’s June quarter was estimated by the company to be in a range of 45.5% to 46.5%, which would be lower than the March quarter’s 47.1% and lower than expected. Management expects operating expenses to be between $15.3 billion and $15.5 billion; that would be higher than the $15.28 billion seen in the March quarter and higher than expected. Apple Why we own it: Apple’s dominant hardware and growing services businesses provide a deep competitive moat and plenty of bundling opportunities. Management’s net cash-neutral strategy provides confidence that free cash flow will continue to fund dividends and buybacks. Competitors: Samsung, Xiaomi, OPPO, Dell and HP Inc. Most recent buy : April 8, 2014 Initiation : Dec. 2, 2013 Capital allocation Apple ended the March quarter with $133 billion in cash and marketable securities. Excluding debt, net cash was $35 billion, and $29 billion of it was to shareholders via buybacks and dividends. The board authorized up to $100 billion of additional share repurchases and a 4% dividend increase to 26 cents per share. “We continue to plan for annual dividend increases,” Cook told CNBC in an off-camera interview ahead of the conference call. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Apple CEO Tim Cook (C) poses for selfies with customers during Apple’s iPhone 16 launch in New York on September 20, 2024.
Timothy A. Clary | AFP | Getty Images
Apple on Thursday evening delivered solid quarterly numbers on many of the things Wall Street was concerned about — from better-than-expected iPhone sales to better-than-feared results in China. However, a small miss on services revenue was disappointing and knocked the stock down in after-hours trading.