After hours on Monday, Apple reported the best September quarter in its history, and investors are selling anyway.
Ahead of the bell shares, the shares are down about 4%, a move that potentially wipes $200 billion off the value of the iPhone giant.
The reason is a the forecast gross margin of 45% to 46% for the Christmas quarter, below the 46.3% analysts expected.
It suggests that rising memory chip prices are now winning the battle against Apple's ability to charge more for its products.
A strong set of numbers
The results themselves were good. Revenue rose 12% to $114.5 billion in the three months to 26 September, ahead of the $113.4 billion analysts expected.
Earnings per share rose 14% to $2.10, beating forecasts of $1.99, although five cents of that came from tariff refunds.
iPhone revenue rose 17% to a September-quarter record of $57.6 billion, helped by the iPhone 18 range and a $100 price rise on the Pro models.
Mac revenue jumped 24% to $10.8 billion.
Apple also expects December-quarter revenue to rise 7% to 10%, to between $153.8 billion and $158.1 billion, which would be its best quarter ever.
That beats the roughly 6% growth Wall Street had pencilled in.
The memory squeeze
The trouble is what it costs Apple to make those sales. John Ternus, who took over as chief executive from Tim Cook on 1 September, used his first earnings call to describe memory prices as "unprecedented".
He expects memory costs to rise further this quarter and to keep climbing beyond it.
Memory chips have soared in price as artificial intelligence (AI) data centres swallow more of the world's supply.
Cook warned in July that the shortage was a "100-year flood".
Apple has so far cushioned the blow by using memory it bought earlier at lower prices, but Ternus said that benefit would shrink over time.
Its purchase commitments rose by $33 billion during the quarter as it tried to lock in supply.
The September margin of 47.9% was itself flattered by about one percentage point from tariff refunds.
The December guidance also reflects the cost of running Apple's new AI-powered Siri, which is now handling 2.5 billion requests a day.
Price rises have limits
Apple's answer so far has been to raise prices, adding $100 to iPhone 17 models and increasing the cost of some MacBooks.
That worked last quarter, with iPhone sales hitting a record despite the increases.
But Dan Coatsworth, head of markets at AJ Bell, warned that higher prices come at a time when consumers are already feeling the pinch.
Bob O'Donnell, chief analyst at TECHnalysis Research, said the big question was how well Apple could weather the component price rises that have already hurt its PC and smartphone rivals.
Cracks elsewhere
The margin warning was not the only blemish.
Services revenue, which includes the App Store, iCloud and Apple Music, grew 9.8% to $31.6 billion, its slowest pace in years.
Apple expects services growth to slow further to 8% to 9% this quarter, short of the 10.7% analysts forecast.
Services matter because they are far more profitable than hardware.
iPad revenue fell 10%, while wearables and accessories dropped 8%.
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Greater China revenue rose 21% to $17.54 billion, but missed forecasts of $18.75 billion.
Operating cash flow of $28 billion fell well short of the roughly $35 billion analysts expected, while inventories climbed to $14.5 billion from $5.7 billion a year earlier.
Priced for perfection
The scale of the reaction partly reflects how much investors were already paying for Apple.
The shares trade at nearly 35 times expected earnings, compared with about 18 times for Alphabet and 23 times for Microsoft.
At that valuation, there is little room for a shrinking margin.
JPMorgan trimmed its price target to $355 from $360, and Morgan Stanley cut its target to $350 from $355, although both kept buy ratings.
Bernstein said it remained cautious in the near term because memory inflation was accelerating.
Evercore ISI said the debate was shifting from demand, which remains healthy, to margins and earnings power.
The bull case
Not everyone is gloomy.
Gene Munster of Deepwater Asset Management said investors were missing the bigger point that the revenue guidance beat expectations, which mattered more than slightly softer margins.
William Kerwin at Morningstar described the flagship iPhone as the linchpin of an ecosystem that gives Apple pricing power and keeps customers loyal.
Dan Ives at Yorkville Ives said the 17% iPhone growth answered worries about weaker demand, and kept his outperform rating and $400 price target.
Before the call, however, Ives had said the December margin guidance would decide whether memory costs or pricing won the profit argument over Christmas.
On that measure, memory costs came out ahead.
