Apple Inc. (NASDAQ:AAPL) continued its downward trajectory in Tuesday's premarket trading, following a fourth consecutive session of losses. The stock closed Monday at $303.42, down 1.78%, even as the Nasdaq Composite surged 2.13%. This divergence has wiped out approximately $503 billion in market capitalization over the past four days and has pushed Apple behind Nvidia Corp. (NASDAQ:NVDA) and Alphabet Inc. (NASDAQ:GOOGL) in market value.
Earnings Beat Scrutiny
The tech giant reported fiscal third-quarter earnings of $2.02 per share, surpassing the analyst consensus of $1.89. However, a closer look reveals that $0.11 of the $0.13 earnings beat came from tariff refunds, accounting for roughly 85% of the outperformance. Excluding these refunds, Apple's earnings per share would have been $1.91, representing a modest 1.1% beat over consensus.
The tariff refunds also provided a significant boost to gross margins, which came in at 50.1% compared to 48.1% on an ex-refund basis. This compares favorably to the 46.5% gross margin reported in the same quarter last year. Core gross margin, excluding the refund impact, still showed strength, coming in 1.6 percentage points higher year-over-year.
Revenue Growth and Segment Performance
Revenue climbed 16.4% year-over-year to $109.42 billion, which CEO Tim Cook described as the company's "strongest June quarter ever." Hardware sales were the primary growth driver, with iPhone revenue up 21.7% to $54.25 billion and Mac revenue surging 28.7% to $10.35 billion. Services revenue grew 12.1% to $30.74 billion, but this fell short of the $31.22 billion analyst forecast, raising concerns about slowing growth in Apple's high-margin services segment.
D.A. Davidson analyst Gil Luria noted that "services growth was slowing," a sentiment echoed by several other analysts. The services segment's share of total sales dipped to 28.1% from 29.2% in the prior year, despite its continued importance to Apple's profitability.
Guidance and Supply Constraints
Looking ahead, Apple projected revenue growth of 9% to 11% for the current quarter, below the approximately 12% that Wall Street had anticipated. Cook cited "very significant" supply constraints, which could impact iPhone sales, though the company expects mid-teens percentage growth for iPhone revenue.
Valuation Concerns
Despite the stock's recent decline, Apple's valuation premium remains intact. Shares are trading at 34.8 times trailing earnings, higher than all major mega-cap peers, including Nvidia at 31.5x, Microsoft at 29.0x, Amazon at 22.8x, and Alphabet at 18.8x. This premium is increasingly difficult to justify given the modest core earnings growth.
Recent analyst actions reflect this unease. DZ Bank's Ingo Wermann downgraded Apple to Hold with a $310 fair value estimate, while Helena Wang at Phillip Securities switched to Reduce with a $290 price target. These targets imply potential gains of 2.2% and losses of 4.4% from Monday's close, respectively.
Risks and Catalysts
Key risks include more severe component shortages, a further deceleration in services growth, regulatory challenges, and the absence of tariff refunds in future quarters. On the upside, supply could rebound faster than expected, and September pricing may help maintain margins.
Apple shares have dropped 10.8% over the last five sessions. Investors are now watching for the August 10 record date for the company's quarterly dividend of $0.27 per share, payable on August 13. As Nasdaq futures rose 0.45% early Tuesday, the market's focus remains on whether Apple can sustain its premium valuation with a core earnings beat of just over 1%.
