Apple Inc. (NASDAQ:AAPL) saw its shares decline 1.8% to $332.25 in late-morning trading Thursday, as investors braced for the company's fiscal third-quarter earnings report due after the closing bell. The tech giant has scheduled a conference call for 5 p.m. EDT to discuss results, which will be closely scrutinized amid a backdrop of rising costs and shifting product mix.
Consensus estimates compiled by Bloomberg point to revenue of approximately $108.7 billion for the quarter ended June, representing a 15.5% increase from the same period a year ago. However, the spotlight is squarely on gross margins, which LSEG projects will contract to 47.9% from 49.3% in the March quarter. This 140-basis-point decline would translate to a gross profit of roughly $52.1 billion, compared with $53.6 billion if March's margin had been maintained. The difference amounts to approximately $1.50 billion, or about $0.10 per share on a pre-tax basis, based on March's diluted share count.
The margin pressure stems largely from higher component costs, particularly memory chips, which have prompted Apple to raise prices on Mac and iPad models but leave iPhone pricing unchanged. The iPhone remains Apple's most critical product, projected to generate $53.6 billion in revenue, or 49.2% of total sales, up 20.2% year-over-year. Analysts at Morgan Stanley (NYSE:MS) have described the iPhone as Apple's 'most inelastic product,' suggesting that recent price hikes on other devices are unlikely to significantly curb demand.
Services continue to be a bright spot, accounting for an estimated $31.36 billion in revenue, or 28.8% of the total, with a robust margin of 76.7%. In contrast, the Products segment—including iPhone, Mac, iPad, and Wearables—is projected to post a margin of just 36.2% under Bloomberg's scenario, a steep decline from 38.7% in March. This divergence highlights the growing importance of Services as a profit engine, even as hardware sales dominate the top line.
Apple's stock currently trades at roughly 40.2 times trailing earnings, a valuation that leaves little room for disappointment. The company briefly surpassed the $5 trillion market capitalization mark on Tuesday, fueled by a roughly 25% year-to-date rally. Options markets are pricing in a potential swing of about 4% by Friday, equivalent to $13 per share or $196 billion in market cap, well above Apple's average post-earnings move of 1.7% over the past four reports.
Jefferies Financial Group (NYSE:JEF) analyst Edison Lee has expressed caution, stating that 'margin is on the downside' and setting a base target of $308.92, roughly 7% below Thursday's late-morning price. The upcoming earnings call also marks a historic moment, as it will be CEO Tim Cook's last scheduled quarterly call before John Ternus assumes the chief executive role on September 1. Cook will remain as executive chairman.
Key risks to watch include potential upside from stronger-than-expected iPhone demand, which could offset margin compression, versus downside from higher component costs, supply chain disruptions, or delayed price hikes on iPhones. The options market's implied volatility underscores the high stakes, as investors weigh the company's ability to sustain its growth trajectory against mounting cost headwinds.
