Apple shares slide as Ternus sounds alarm on memory costs

By Aditya Soni and Harshita Mary Varghese

Nov 3 (Reuters) - Apple shares tumbled about 4% on Tuesday as its first results under new CEO John Ternus showed that rising memory chip costs were denting the iPhone maker's envied margins, the latest sign of the AI boom's toll on the technology industry.

Sales of smartphones, PCs and other electronics have already suffered this year from price hikes driven by soaring memory chip costs as the AI industry's data-center race absorbs supply.

That even Apple, long known for its supply-chain prowess, is feeling the squeeze shows virtually no firm is spared. The warning follows Intel's bleak forecast last week on collapsing PC chip demand.

"What we’re seeing with memory pricing right now is unprecedented," Ternus said on his first earnings call as CEO.

"For the December quarter, we expect even higher memory costs. And looking beyond the December quarter, we see the pricing for memory purchases continuing to increase."

Gross margin, the share of revenue Apple keeps after production costs, slipped to 47.9% in the September quarter from the June quarter, even with the boost from tariff refunds.

The company expects its gross margin to shrink further to between 45% and 46% in the December quarter, as it also grapples with the costs of rolling out an AI-powered Siri that is central to its AI plans.

To cushion the blow, Apple has been drawing on memory chips bought earlier at lower prices and has moved to lock in supplies.

Its manufacturing purchase obligations, or orders placed with suppliers and contract manufacturers, increased by $33 billion to $89.7 billion as of Sept. 26, a filing showed.

TERNUS' PRODUCT BLITZ

Apple's drop on Tuesday also weighed on the S&P 500 and the Nasdaq. Expectations were high going into the results because Apple's restraint on AI spending had made it a refuge for investors uneasy about the AI boom's soaring costs, helping its shares gain by more than a fifth so far this year.

The memory crunch comes just as Ternus rolls out a product blitz packed with Apple firsts, including its first foldable phone, iPhone Duo, and its first touchscreen MacBooks.

Apple has also been raising prices to cushion the hit to profitability. That, along with strong demand for the premium iPhone 18 Pro lineup, helped it beat fourth-quarter sales estimates and forecast upbeat revenue.

But some analysts warn that more price hikes risk scaring off buyers as inflation is already climbing.

The CEO comments imply "Apple products are going to become even more expensive, which is not ideal at a time when the consumer is feeling the pinch from a higher cost of living," said Dan Coatsworth, head of markets at AJ Bell.

Apple is set to lose over $170 billion in market value from its $4.94 trillion valuation, if losses hold.

The stock trades at nearly 35 times expected earnings over the next 12 months, compared with 18.23 times for Alphabet and 23.43 times for Microsoft.

(Reporting by Harshita Mary Varghese in Bengaluru; Editing by Devika Syamnath)