Apple Inc. (NASDAQ: AAPL) experienced a sharp decline on Friday, closing at $308.91, a drop of nearly 7% for the session. The sell-off was triggered by revelations that a significant portion of the company's quarterly earnings beat was due to one-time tariff refunds rather than operational strength. Over the week, the stock lost 7.2% of its value, erasing approximately $350 billion in market capitalization.
The tech giant reported earnings per share (EPS) of $2.02 for its fiscal third quarter, surpassing the consensus estimate of $1.89. However, a closer examination revealed that tariff reimbursements contributed $0.11 per share, which accounted for roughly 85% of the $0.13 EPS surprise. Excluding this benefit, core earnings stood at approximately $1.91, only marginally ahead of expectations.
Gross Margin Boost from Refunds
Gross margin also received a substantial boost from the refunds. The reported gross margin was 50.1%, but after removing the two-percentage-point refund effect, the adjusted margin was 48.1%, just 18 basis points above the Street's forecast of 47.92%. This suggests that Apple's underlying profitability is not as robust as the headline numbers imply.
Hardware Sales Strong, Services Disappoint
Despite the earnings quality concerns, hardware sales were robust. iPhone revenue hit a record for the June quarter at $54.25 billion, up 21.7% year-over-year and beating estimates of $53.86 billion. Mac sales also outperformed, reaching $10.35 billion versus the expected $8.74 billion, driven largely by higher laptop sales.
However, services revenue came in at $30.74 billion, below the consensus of $31.22 billion, marking a slowdown from the previous quarter's 16.3% growth to 12.1%. iPad sales also fell short, declining 5.9% year-over-year. CFO Kevan Parekh attributed the services softness to shifts in mobile gaming and App Store policy changes, while analysts like Gil Luria of D.A. Davidson warned that services growth could decelerate further.
Outlook Misses Expectations
Investor concerns were compounded by Apple's guidance for the September quarter. The company projects revenue growth of 9% to 11%, below the Wall Street consensus of approximately 12%. iPhone revenue growth is expected in the mid-teens, trailing the 17.6% analysts had anticipated. Gross margin is forecast to be in the 47% to 48% range, which aligns with the adjusted figure from the last quarter.
CEO Tim Cook cited "very significant" supply constraints, particularly for advanced processors and memory, as AI data centers continue to absorb capacity. Apple's inventory levels have surged as a result, with total inventory climbing 94% to $11.09 billion since September, and component inventories jumping 260% to $7.65 billion.
Market Context and Valuation
The broader market rallied on Friday, with the Nasdaq Composite up 1% and the S&P 500 gaining 0.7%, but Apple's decline stood in stark contrast. The sell-off also reshaped the mega-cap landscape, with Apple's market value now $348 billion behind Nvidia (NASDAQ: NVDA), which rose 3% to a $4.90 trillion valuation. Apple's trailing P/E ratio of 37.4 is now 22% higher than Nvidia's and 35% above Microsoft's (NASDAQ: MSFT).
Following the results, four brokerages lowered their price targets on Apple while three raised them. The median target now stands at $330, implying a potential 6.8% upside from Friday's close. Investors will be watching for further target adjustments and the $300 intraday low reached on Friday as key levels to monitor.
The path forward carries risks in both directions. Improved supply conditions or higher iPhone pricing could trigger a rebound, while ongoing memory inflation, continued App Store weakness, or demand pulled forward ahead of price hikes could pressure earnings forecasts. As trading resumes Monday, focus will remain on supply chain updates and whether Apple can sustain its growth without the aid of one-time benefits.
