The Risks to Apple Are Increasing

Image Source: TradingView

By Brian Nelson, CFA

On July 31, Apple (AAPL) reported better than expected fiscal third quarter results with revenue and GAAP earnings per share coming in ahead of the consensus forecast. The iPhone maker reported quarterly revenue of $94 billion, up 10% year-over-year and better than the Street’s forecast of $89.16 billion, while operating income jumped to $28.2 billion from $25.4 billion in last year’s quarter. Quarterly diluted earnings per share came in at $1.57, up 12% year-over-year and better than consensus of $1.43.

Management was upbeat in the press release:

Today Apple is proud to report a June quarter revenue record with double-digit growth in iPhone, Mac and Services and growth around the world, in every geographic segment. At WWDC25, we were excited to introduce a beautiful new software design that extends across all of our platforms, and we announced even more great Apple Intelligence features.

We are very pleased with our record business performance for the June quarter, which generated EPS growth of 12 percent. Our installed base of active devices also reached a new all-time high across all product categories and geographic segments, thanks to our very high levels of customer satisfaction and loyalty.

Apple’s iPhone sales rose to $44.6 billion, up from $39.3 billion in the same period a year ago and $4 billion better than the consensus forecast, while sales of Mac expanded to $8.05 billion from $7.01 billion in last year’s quarter (consensus was at $7.3 billion). Sales of the iPad declined in the quarter, and so did its Wearables, Home and Accessories division, but services revenue leapt to $27.4 billion, up from $24.2 billion in the year-ago period and better than consensus of $26.85 billion. Importantly, Greater China sales increased 4.4% to $15.4 billion in the quarter, up from $14.7 billion in the fiscal third quarter of last year.

Apple ended the quarter with $133 billion in cash and marketable securities and $101.7 billion in commercial paper and term debt. For the nine months ended June 28, cash generated by operating activities totaled $81.8 billion, down from the $91.4 billion mark it achieved in last year’s period, while capital spending totaled $9.5 billion versus $6.5 billion in the same period a year ago. Apple hauled $72.3 billion in free cash flow during the prior nine months, well in excess of cash dividends paid of $11.6 billion over the same time. Apple bought back a whopping $70.6 billion in common stock during the nine months ended June 28.

Here’s management’s outlook for the September quarter:

We expect our September quarter total company revenue to grow mid- to high single digits year-over-year. We expect Services revenue to grow at a year-over-year rate similar to what we reported in the June quarter. We expect gross margin to be between 46% and 47%, which includes the estimated impact of the $1.1 billion tariff-related costs… We expect operating expenses to be between $15.6 billion and $15.8 billion. We expect OI&E to be around negative $25 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 17%.

Apple’s fiscal third quarter results were a head-turner and showcased outperformance with the iPhone and Greater China sales, through we note that tariff-related headwinds will impact the firm’s cost structure and possibly its product pricing strategy in the months ahead. The Street is also anxious when it comes to Apple’s strategy in artificial intelligence, where it is spending much less in this area than its Magnificent 7 brethren, as well as the sustainability of its current revenue share agreement with Google. The magnitude of risks is growing to the Apple story, but we still like shares in the newsletter portfolios given its strong underlying performance, robust cash flow generation and superb balance sheet. Our fair value estimate stands at $235 per share.

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