Apple's iPhone Growth May Slow as Component Costs Test Margins

Apple enters its November 2 earnings report with a demanding valuation and a less forgiving mix of growth and cost pressures. UBS expects September-quarter revenue of $112.8 billion and diluted earnings of $1.97 a share, slightly below Visible Alpha estimates of $113.6 billion and $1.99.

The bank's iPhone estimate is $56 billion, or roughly 14% growth from a year earlier. That would still be healthy, but it would be a clear slowdown from the 22% to 23% growth reported in each of the previous three quarters. UBS says higher selling prices, helped by product mix and recent price increases, should offset some weakness in unit volumes.

Services, normally a steadier source of higher-margin growth, may also cool. UBS forecasts $31.6 billion of services revenue, up 10% from a year earlier but slower than in the June quarter. Its checks suggest low-single-digit growth in several important categories, including the App Store.

Gross margin is the sharper risk. UBS expects 47.5%, down from 50.1% in the June quarter, when a larger tariff refund provided an unusual benefit. Stripping out tariff effects, the bank estimates gross margin fell about 70 basis points from a year earlier and 100 basis points sequentially, mainly because memory chips became more expensive. A basis point is one-hundredth of a percentage point.

Apple could still beat earnings if operating expenses are lower than expected, but UBS argues that investors may give less credit to a beat created by spending restraint rather than stronger demand. The firm kept a Neutral rating and a $296 price target, based on about 29 times its blended 2027 and 2028 earnings estimate.

Apple's investor-relations calendar confirms that the fiscal fourth-quarter call is scheduled for November 2. The most important questions will be whether management sees iPhone unit demand holding up, whether services growth is stabilizing and how much component inflation will affect the December-quarter margin. With the shares up about 13% since late July in the source period, a merely in-line quarter may not be enough if the outlook points to slower growth.