Apple stock falls after China, services performance miss expectations

Apple Inc. reported fiscal third-quarter results that topped Wall Street expectations on overall revenue and earnings, driven by strong iPhone and Mac sales. 

However, weaker-than-expected performance in China and its high-margin services business weighed on investor sentiment, sending shares down about 3.9% in after-hours trading.

The iPhone maker reported revenue of $109.42 billion for the quarter ended June 27, up 16.4% year over year and above analysts' expectations of roughly $108.2 billion to $108.65 billion. 

Earnings came in at $2.02 per share, benefiting in part from 11 cents per share related to US tariff refunds. 

Even excluding those refunds, profit exceeded Wall Street estimates.

iPhone and Mac sales power quarterly results

Apple's iPhone business remained the primary growth engine during the quarter. 

iPhone revenue climbed 21.7% to $54.25 billion, surpassing analyst estimates and marking the company's strongest June-quarter iPhone performance. 

Mac sales also exceeded expectations, rising 28.7% to $10.35 billion, helped by demand for the entry-level MacBook Neo and high-end MacBook Pro.

Chief Executive Officer Tim Cook attributed the company's supply constraints to shortages in advanced chipmaking technology.

"If you look at the root causes behind those, it's that we're having an incredibly strong product cycle beyond our expectations, and the (advanced chipmaking) supply chain just fundamentally has less flexibility in it to meet the high levels of demand," Cook told Reuters.

Apple has already increased prices for Macs and iPads as shortages of memory chips and processors continue to pressure supply. 

The company said gross margin reached 50.1%, with tariff refunds contributing two percentage points. 

Excluding those refunds, gross margin was 48.1%, still above analyst expectations.

China and services fall short of expectations

Despite overall revenue growth, Apple's performance in two closely watched businesses disappointed investors.

Revenue from Greater China totaled $18.82 billion, missing analyst expectations of about $19.6 billion despite increasing 22.4% from a year earlier.

The company's services division, which includes the App Store, iCloud and subscription businesses, generated $30.74 billion in revenue. 

While the segment grew 12.1% year over year, it fell short of analyst expectations of roughly $31.2 billion to $31.4 billion.

Elsewhere, iPad revenue declined 5.9% to $6.19 billion, below forecasts. 

Cook attributed the decline to a difficult comparison with the prior year when Apple launched the budget-focused A16 iPad.

Wearables revenue increased 6.5% to $7.88 billion, slightly exceeding expectations.

AI strategy and leadership transition remain in focus

Apple's results come as investors continue comparing the company's artificial intelligence strategy with rivals that have dramatically increased spending on AI infrastructure.

Unlike several large technology peers, Apple has taken a more measured approach to capital spending, a strategy that has helped position it as a relatively defensive technology stock amid investor concerns over AI-related spending. 

The company recently reclaimed its position as the world's most valuable company with a market value approaching $5 trillion.

The company is also preparing for a leadership transition. 

The quarter marks Tim Cook's final earnings report as chief executive before hardware chief John Ternus takes over on Sept. 1.

Apple also continues to face supply chain challenges as demand for advanced chips and memory components rises across the technology industry. 

The shortages have already prompted price increases for Macs and iPads, while Wall Street increasingly expects higher iPhone prices when the next generation of devices is introduced later this year.