Apple Stock Is Falling. 'Let the Slowdown Begin,' and More Earnings Takeaways. — Barrons.com

What happened

Apple stock fell 3.7% before the open Tuesday even though the company beat earnings and revenue expectations for its fiscal fourth quarter and gave guidance above Wall Street estimates. Surging memory costs are pressuring the stock and its profit margins.

Confirmed

Global impact / market context

Rising memory prices raise Apple's component costs, which can shrink the profit it keeps on each sale. Apple guided for lower gross margins than analysts expected, so investors may worry that hardware profit will fall even if sales hold up.

Analyst inference

Analysts are split. KeyBanc sees slowing hardware demand and extreme overvaluation, while Citi calls Apple a defensive stock with attractive valuation on price-to-free-cash flow, which means price compared with cash the business generates after spending.

Analyst inference

What to watch

1. Apple's CEO said memory pricing is unprecedented and expects prices to keep rising this quarter and beyond, so watch whether higher component costs further pressure Apple's gross margins. Confirmed
2. Watch whether Apple raises device prices or changes product plans to offset higher memory costs, since KeyBanc said its revenue guidance already assumes slowing hardware growth despite price increases. Proposed
3. Watch whether unit demand keeps falling, as KeyBanc argues, because weaker device sales would reduce revenue and could outweigh any benefit from higher prices and Apple's services business. Analyst inference

Evidence

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