Why Apple's blockbuster earnings weren't enough to lift the stock

By Christine Ji

While the iPhone 17 is seeing explosive demand, analysts are flagging supply-chain bottlenecks and a divisive Google AI partnership that one critic likens to Apple 'selling its soul'

Apple projects up to 49% gross margins in the current quarter, but it's unclear to investors if it can manage costs around supply-chain issues.

Apple's December-quarter earnings results left investors with unanswered questions about both its iPhone business and its artificial-intelligence strategy, overshadowing the company's record-breaking results.

The iPhone maker blew past Wall Street expectations on Thursday when it announced $143.8 billion in revenue, which was about 4% higher than the FactSet consensus. Despite Apple's (AAPL) earnings beat and strong guidance, analysts seemed unimpressed at Friday's open, with the stock down 2%.

Thanks to the success of the iPhone 17 series, Apple has seen "unprecedented demand," according to CEO Tim Cook. But meeting that strong demand could be challenging due to supply-chain issues. While Apple guided for upbeat revenue growth of between 13% and 16% and gross margins of 48% to 49% for the March quarter, Wall Street still has concerns that rising memory costs could lead to margin contraction further down the road.

Needham analyst Laura Martin wrote that Apple will only be able to achieve double-digit revenue growth if it can continue to align supply with demand, but she pointed out that the iPhone 17 was largely sold out toward the end of the December quarter. The company also did not provide any commentary on its exposure to rising memory prices beyond the current quarter.

On Friday, Jefferies analyst Edison Lee wrote that Apple may continue to experience robust iPhone demand in the current quarter as consumers rush to buy phones ahead of anticipated price hikes. Memory price increases could begin to impact Apple's margins toward the middle of 2026, Lee said, but he expects that Apple will raise prices on the iPhone 18 to compensate. Management did not provide comment during the call on the impact of memory prices on iPhone demand or pricing strategy.

Read: Apple's stock rises as Tim Cook gives just enough detail on Wall Street's most burning question

The supply-chain issues aren't limited to memory components: J.P. Morgan's Samik Chatterjee believes Apple is experiencing bottlenecks in the availability of advanced manufacturing nodes.

"Management's tone on the call indicated that the availability of leading-edge foundry capacity is a bigger concern for the company as it looks to match supply with demand, which has exceeded expectations, rather than memory being the single largest factor, in our view," Chatterjee wrote on Friday. However, the strong quarter led him to raise his Apple price target to $325 from $315.

The earnings call didn't provide much additional detail on Apple's partnership with Google (GOOGL) (GOOG) to power Apple Intelligence with Gemini.

The AI strategy is controversial: Chatterjee and Wedbush's Dan Ives believe the Google partnership is a positive development, with Ives writing on Friday that the Gemini partnership was "a necessary development" and an opportunity for a new services-revenue stream. Martin, however, characterized Apple's move "as selling its soul/future to the devil."

Apple was reportedly considering using Anthropic's models to power its AI initiatives but ultimately decided against it due to the high price tag. "We believe [Apple] should have paid Anthropic 2x-4x more and kept its data hidden from [Google], its primary competitor for iPhones," Martin wrote.

See more: Apple's stock can climb 35% this year - if these four scenarios play out

-Christine Ji

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