Apple Slides Despite Record Revenue as Services Test 36x P/E

What the Market Saw Beyond Apple's Record Revenue

Apple's problem is not declining revenue. According to earnings reported by Yonhap News Securities on the 2nd local time, Apple's July–September revenue rose 12% year over year to a quarterly record, but investors reacted more sharply to forecasts of slower services growth and a lower gross margin in October–December. The real implication is that, despite the absolute level of growth, the next catalyst needed to sustain its premium valuation has become less clear.

Slower services growth reduces expectations for recurring revenue expansion, while higher memory costs squeeze the share of product sales that remains as profit. Gross margin is the percentage of revenue remaining after deducting the direct costs of providing products and services. The tension in these earnings comes from the divergence between record revenue and the profitability outlook.

Why Apple Shares Fell to $328.81

Apple shares fell 1.83% during the regular session. In after-hours trading, they dropped as much as 4% before paring losses, ultimately closing down 2.81% at $328.81. The market's response suggests that record revenue alone was not enough to offset signs of an October–December slowdown.

In recent weeks, Apple's market capitalization exceeded $5 trillion, or approximately 6,719 trillion won, on six occasions intraday and also crossed that threshold on a closing-price basis before falling back below it. Record top-line growth is already priced in. What remains unproven is a recovery in services and an easing of cost pressures.

The Gap Between a 36x Valuation and 1% Profit Growth

Apple's price-to-earnings ratio stands at 36x, while net profit is projected to grow just 1% next year. Because the price-to-earnings ratio shows how many times net profit a stock trades at, what determines the multiple in this setup is not a revenue record itself but how quickly profit can grow from here.

Oppenheimer's Martin Yang said there was insufficient upside potential to justify the current valuation premium. He explained that a more bullish outlook would require stronger iPhone revenue growth and a rebound in services. Recovering growth would revive the case for a premium valuation, but if the slowdown persists, the 36x multiple would become more of a burden than a reflection of expectations.

Memory Costs and the Limits of Price Increases

John Ternus and Kevan Parekh said dwindling inventories have made cost pressure from expensive memory components a significant burden. Tracing the supply chain through to finished devices makes the path to earnings clear. If higher component costs cannot be fully passed on through product prices, gross margin will decline first.

Apple raised prices across its entire product lineup to offset higher costs. Maintaining those increases could help absorb some cost pressure, but without details on price increases and demand changes by product category, there is no basis for calculating the impact. Whether revenue and gross margin move higher together in the next earnings report will determine whether the pricing strategy has succeeded.

Overlapping Pressures on Services and the App Store

The services business faces both a slower growth outlook and uncertainty over its commission structure. Courts and regulators around the world have moved to curb the fees the App Store has charged developers, and the article stated that OpenAI's ChatGPT app is also showing signs of leaving that commission ecosystem.

The earnings impact of this development lies in the pace of services revenue growth. However, the available information does not specify how commission changes would affect Apple's financials. Rather than assuming regulatory pressure will immediately lead to a particular decline in profit, investors should watch whether services growth actually slows.

The Bullish Alternative Offered by the iPhone Duo

The Wall Street Journal (WSJ) said that “strong demand for the iPhone Duo, Apple's first foldable phone, is at least providing a glimmer of hope.” The bullish scenario is one in which stronger iPhone revenue growth and a services rebound narrow the gap between top-line growth and profit. If price increases hold while demand for new products remains firm, Apple will also be better positioned to absorb cost pressures.

The bearish scenario is one in which the services slowdown continues and memory costs push gross margin even lower. Sales and demand figures for the first foldable iPhone have not been disclosed, so it is too early to project a growth turnaround based on the new product alone. The challenge facing John Ternus since taking office in September is ultimately to convert interest in new products into earnings.

Investment Metrics to Watch in the Next Earnings Report

• Services growth: Watch whether growth recovers after the October–December slowdown. Without a rebound, the case for a valuation reassessment will weaken.
• Gross margin: Assess how memory-cost pressures and price increases across the product lineup are actually reflected in profitability.
• iPhone revenue: The bullish scenario depends on interest in the iPhone Duo translating into stronger revenue growth.
• App Store structure: The impact of regulatory restrictions and signs that OpenAI's ChatGPT app may leave the ecosystem must be tested against the next set of services-growth figures.

The revenue record is already in place. The next turning point for Apple shares will come when a services rebound and resilient gross margin appear in the same earnings report.

This article was automatically summarized and analyzed from the original news report. View Original Article (Yonhap News Securities)