Apple earnings beat estimates, but stock dips on $900M tariff hit warning

iPhone maker Apple released its second-quarter fiscal results on Thursday, and on the surface, it was a solid beat. The tech giant exceeded Wall Street's expectations in most major areas, including earnings per share (EPS), revenue, and hardware sales. Yet, despite this strong showing, Apple stock dropped as much as 4% in after-hours trading, according to Google Finance data..

Why the disconnect? Let’s break down what happened.

Apple Q2 earnings breakdown: What happened

Here’s a snapshot of how Apple performed compared to analyst estimates:

Source: Company Report, StreetAccount Estimates

Let’s look deeper into each business line:

• iPhone: $46.84B in revenue, beating estimates and up from $45.9B last year. Apple still rules the smartphone game.
• Mac: $7.95B, an increase of nearly 7% YoY. Boosted by new MacBook Air models.
• iPad: $6.4B, up 15% YoY, likely due to the launch of new mid-range models.
• Wearables: $7.52B, down 5% YoY. Cook attributed this to the absence of new product launches like last year’s Vision Pro.
• Services: $26.65B, grew by 11.65% but missed estimates. Slower growth here is a red flag for long-term margins.

Apple’s regional performance in Q2

• Americas: Up nearly 8%, driven by strong consumer demand.
• Greater China: Down to $16B, slightly below expectations.
• Rest of Asia, Europe, and Japan: No major surprises, but currency headwinds played a role.

Source: Company Report

Despite the earnings beat, the market was not impressed as Apple stock fell nearly 4% in after-hours trading, showed Google Finance. So where did things go wrong? Let us break it down.

Why did Apple stock fall post Q2 earnings beat?

1. Geopolitical risk and tariffs: Apple disclosed that tariffs would increase its costs by a staggering $900 million in the June quarter. The increase in supply chain costs puts pressure on margins and profitability. Despite efforts to optimize operations in Q2, the financial impact is set to materialize more fully in Q3, creating near-term uncertainty.
2. Services missed the mark: Apple’s Services division, which includes iCloud, Apple TV+, Apple Music, and lucrative licensing deals, came in just shy of expectations. Revenue hit $26.65 billion, missing the $26.70 billion estimate. While it grew 11.65% YoY, that’s a slowdown from the 14.2% growth in the same quarter last year. This deceleration raises concerns about the sustainability of Apple's high-margin services growth.
3. China Slowdown: Apple’s sales in Greater China came in at $16 billion, lower than the $16.8 billion analysts expected. China is a critical region for Apple, and any softness there signals broader challenges, including local competition and currency effects.
4. AI Feature Delay: Some of the highly anticipated AI features, especially updates to Siri, were postponed to the next year. This delay could reduce the immediate appeal of Apple’s next product cycle, especially in a market increasingly excited about generative AI.

What led to Apple’s $900 million cost surge fear?

During the earnings call, CEO Tim Cook explained that tariffs are expected to add $900 million in costs in the June quarter. While Apple optimized its supply chain to limit Q2 impact, the full brunt is coming in Q3.

Cook also said it’s difficult to predict beyond June, which adds more uncertainty. Even though Apple is shifting manufacturing, half of the U.S.-bound iPhones are now made in India, and many other products are sourced from Vietnam, most production still happens in China.

This exposure to Chinese manufacturing means that any change in U.S.-China trade relations could significantly impact costs.

Apple’s tariff strategy and future guidance

Apple is taking a multi-pronged approach to mitigate rising costs and geopolitical risks:

• Diversifying supply chain: Apple has significantly expanded production in India and Vietnam. Currently, about 50% of iPhones destined for the U.S. are made in India. Vietnam handles a growing share of production for accessories and other devices.
• Domestic sourcing boost: Tim Cook stated that Apple is purchasing $19 billion worth of chips from U.S. suppliers in 2024, reducing reliance on international semiconductor supply chains.
• Financial guidance: For Q3, Apple expects revenue to grow in the low to mid-single digits. That implies growth in the range of 1% to 5% from $85.78 billion last year. Gross margins are forecast at around 46%, which includes the $900 million in expected tariff-related costs.
• Capital allocation: Apple announced a $100 billion share buyback program, slightly lower than the $110 billion from last year. It also raised its dividend by 4% to $0.26 per share.

Despite these headwinds, Tim Cook emphasized that Apple will continue making "thoughtful and deliberate" decisions focused on long-term value and innovation.

A solid quarter for Apple but headwinds ahead

Apple may have beaten Wall Street’s expectations, but the market is clearly focused on what is coming next for the tech giant. Slowing Services growth, China concerns, delayed AI features, and rising tariff-related costs paint a more complicated picture. 

Still, Apple’s fundamentals remain strong. iPhone and Mac sales are healthy, and the company is proactively navigating geopolitical headwinds. For long-term investors, this dip might just be a buying opportunity, but it’s clear the path ahead won’t be entirely smooth.

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