Apple Beat on iPhones. The Stock Fell Nearly 4% Anyway.
Revenue rose 12%, EPS topped estimates and China sales climbed 21%. Wall Street cared more about how much profit Apple keeps next quarter than about the growth it just posted.
The 20-second read
Why Wall Street was disappointed by a good report
Apple topped market expectations in its fiscal fourth-quarter 2026 results, reported Nov. 2.
Revenue was $114.48 billion and earnings per share were $2.10. Both beat consensus estimates of about $113.4 billion in revenue and $1.99 in EPS.
iPhone revenue was about $57.58 billion, up 17% from a year earlier. Mac sales grew about 24%. China revenue rose 21% to about $17.5 billion. Despite worries that the China business was shrinking, sales there were recovering.
But China revenue fell short of the market's expectation of about $18.8 billion. iPad and wearables also were weak. Growth was strong, but not every business grew at once.
From 47.9% to 45.5%: the number the market watched
The most important figure in this report was not revenue. It was gross margin.
Apple gross margin comparison
| Measure | Gross margin |
|---|---|
| Fourth quarter, as reported | 47.9% |
| Excluding tariff refund effect | 46.9% |
| Midpoint of next-quarter guidance | 45.5% |
The midpoint is 2.4 percentage points below the reported figure. The 46.9% is a simple calculation that removes a tariff refund effect of about 1 percentage point. The 45.5% is the midpoint of guidance for the next quarter.
The $2.10 in EPS includes $0.05 from a tariff refund. Without it, EPS was $2.05, still a solid result.
The problem is next quarter. Apple guided to a gross margin of 45% to 46% for October to December. The 45.5% midpoint is 1.4 percentage points below this quarter's margin excluding the refund.
Rising memory chip prices and AI-related costs are pressuring profitability. As a simple illustration, on $100 billion of revenue, a 1 percentage point drop in margin cuts gross profit by $1 billion.
For a company as large as Apple, a small change in margin means billions of dollars in profit.
Can services and AI offset higher costs?
Apple's services revenue hit a record of about $31.6 billion. But guidance for next-quarter services growth was 8% to 9%, below the roughly 10.7% the market had expected.
Services carry higher margins than hardware. If memory costs weigh on iPhone profitability, faster services growth could cushion the blow. This guidance did not show that kind of acceleration.
Siri AI operating and development costs add to the pressure. If AI drives iPhone upgrades and higher services usage, it could become a long-term growth engine. If costs rise first and monetization is delayed, profit growth could lag revenue growth.
- Both revenue and EPS beat market expectations.
- The main concern is not last quarter's results but the profitability outlook for next quarter.
- EPS excluding the refund effect was about $2.05.
- It is unclear how much of the refund effect was built into the consensus, so comparing against a separate estimate calls for caution.
- Higher costs weigh on hardware margins.
- The actual impact depends on component purchase contracts, inventory, product prices, and the share of premium products.
- It is positive if AI increases customers' device upgrades and services spending.
- What matters is less the rise in spending itself than whether it generates additional revenue and profit.
- The quality of the earnings and the price of the stock should be judged separately.
- It is worth comparing changes in the future EPS outlook, the bottom in margins, and the price-to-earnings ratio (P/E) together.
What to watch
Insight Times Editorial Desk
