Why did Apple shares plunge over 6% after beating Q3 estimates?

“Today, Apple is proud to report our strongest June quarter ever, with double-digit revenue growth across iPhone, Mac and Services, and in every geographic segment…I couldn’t be more confident in his leadership, in the executive team and the extraordinary people at Apple,” Cook said during his final earnings call.

The Apple CEO had announced his retirement in April after 15 years at the helm of the company. John Ternus, Apple’s head of hardware engineering, will assume the role on September 1.

Apple’s record-setting results

The iPhone maker posted a steady surge in sales and profits on Thursday — defying Wall Street expectations and Apple’s own forecast of 14% to 17% sales growth. The company said sales for its fiscal third quarter ended June 27 were up 16.4% to $109.42 billion. Its third-quarter profits stood at $2.02 per share with 11 cents attributable to tariff refunds from the US government.

The results were driven by a 21.7% increase in iPhone ⁠sales to $54.25 billion. Reuters noted that the figure was far higher than analyst estimates of $53.86 billion. The recent iPhone sales were also Apple’s best-ever for a third quarter, when phone sales typically begin to slow as customers anticipate new models during the fall. 

Apple had called the demand spike an “unprecedented challenge” for the consumer electronics industry. The company raised the prices of its Macs and iPads last month — citing a memory-chip shortage brought on by the artificial intelligence boom. Analysts and consumers also expect the price of iPhones to surge later this year.

Why did Apple shares fall after ‘strongest’ June results?

Rising memory costs and supply chain constraints have become a growing concern for Apple and its investors. The tech giant forecast sales for the current quarter ending in September would grow more slowly than Wall Street targeted amid a shortage of required parts. It is pertinent to note that tariff benefits also gave a one-time boost to profit margins during the June quarter. 

According to Reuters, Chief Financial Officer Kevan ⁠Parekh told analysts on a call that Apple expects revenue growth of 9% to 11% in the quarter compared with a year earlier. LSEG data cited by the publication reveals that Wall Steet had predicted a 12% rise instead. Parekh forecast that iPhone revenue would grow at a mid-teens rate, compared with Wall Street’s target of 17.6%, and that gross profit margins would be between 47% and 48%.

The issue is a supply problem rather than slowing demand. The technology industry has been left scrambling in recent months, especially for high-end processors and memory. CEO Tim Cook added on Thursday that Apple was “evaluating all options” for alternative suppliers of memory chips. 

Apple facing supply constraints?

Cook explained during an interview with Reuters that the main supply constraint in the just-ended fiscal third quarter was an industry shortage of advanced chipmaking technology used to produce the Apple silicon chips at the heart of its devices. That was particularly true for the Mac lineup, whose sales grew 29% on the strength of the entry-level MacBook ⁠Neo and the high-end MacBook Pro despite price increases.

“We’re seeing some very significant (supply) constraints currently with limited flexibility in the supply chain to remedy it,” he added during an analyst call.

According to the company, one of the supply issues pertained to key chip components within Apple products. Devices such as Macs and iPhones use microprocessors with “advanced nodes” – akin to computer chip technology that allows them to operate more quickly – that are mostly manufactured through Taiwan-based TSMC. But unexpectedly high demand for new Apple devices and massive demand for graphics processors and generative AI hardware across the tech industry have clashed against the limited production capacity of TSMC and similar companies.

“It’s not a regular supply issue. It’s a demand forecast issue, to be candid. The iPhone and the Mac are both doing remarkably better than we thought they would do…We’ve got a quarter that we’re going to be scrambling on the supply side, essentially,” multiple reports cited Cook as telling analysts.