John Ternus has run Apple (AAPL) since Sept. 1. On Monday, Nov. 2, he delivered his first piece of bad news. In the September quarter, sales rose 12%, a touch more than Wall Street had penciled in. Then came the earnings call an hour later. Apple said to expect its services business to keep slowing and its profit margin to keep falling this quarter. The shares had been flat after the close. They fell as much as 4%.
The margin number was fine for now. Gross margin, the share of each sale left after the cost of making the product, came in at 47.9%. That beat estimates. The problem is what comes next. Memory chips cost a lot more this year. Apple had a stockpile of cheaper parts bought earlier, and that stockpile is running low, Ternus and finance chief Kevan Parekh said. Apple raised prices across the board last quarter to cover the cost. The open question, as the Journal's Rolfe Winkler puts it, is whether people start waiting longer to upgrade their iPhones.
Services is the other worry. That's the App Store, subscriptions and fees. It was the steady engine of the Tim Cook years. App makers now pay Apple less, because courts and regulators around the world have forced the fees down. OpenAI, one of the App Store's biggest fee payers, began sending ChatGPT subscribers to pay on its own website this summer. The one clear bright spot is the iPhone Duo, the $1,999 foldable. People are buying it faster than Apple can make it. Shipping dates slid to January.
A safe stock at 36 times earnings
Here's the tension. Investors bought Apple this year as shelter from the AI spending race. Apple spends its cash on buybacks and dividends, not on data centers. That felt safe. But look at the price. Oppenheimer's Martin Yang puts it at 36 times what Apple is expected to earn next year. And those earnings are expected to grow only 1%. He sees "insufficient upside to justify the premium." In Monday's regular session, Apple fell almost 2% before the report. On Tuesday, Nov. 3, by our own pull, it closed at $331.90, down 1.90%.
Our read
This is an Investments/Risk · IN04 story. Apple is held at weight in 24 of our model books. Nothing was added. We're not trading a 4% after-hours move. We do take the lesson. A quality company can still be an expensive stock. Thirty-six times earnings with 1% growth leaves little room for a slow quarter. The safety people bought was the business. The price is a different thing, and no price is safe just because the company is.
Here's the check for your own money. Apple is one of the biggest holdings in any S&P 500 index fund. So you probably own it even if you never bought it. Open your 401(k) fund's top-ten holdings list this week and see how much is Apple. Then add up the other giants. That's your real bet on a handful of names, and most people have never looked at it. If the number surprises you, that's the conversation to have before the next earnings call, not after it. You find the umbrella while it's still dry out.