The AI Boom Just Came for Apple's Profits

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Tuesday, November 3rd. In today's episode, we'll break down how the AI boom is squeezing Apple's profits, even though Apple isn't building data centers. We'll also explain why Palantir nearly doubled their revenue, but the stock is still getting hammered. Then stick around to the end of the show to find out what history says usually happens to stocks after a midterm election, and why this year could be different. We've got a great show for you today. Let's go. Stocks started off the month looking like they were finally ready to bounce back from the October tech sell-off, but that rebound didn't last long. Stocks did open higher on Monday, but by the close, the S&P 500 was down about half a percent, and the NASDAQ lost just over 1%. It was actually the worst intraday reversal of the year. The NASDAQ is now officially in correction territory, down more than 10% from its peak. Back in early October, AI continues to lead the sell-off. AI companies like Oracle, Intel, and AMD were some of the biggest S&P 500 losers yesterday. But just like I've been talking about for the last couple of weeks, outside of tech, the rest of the market was fine. Eight of the 11 S&P 500 sectors finished in the green on Monday. Meanwhile, oil prices fell 7% on Monday after Iran signaled openness for negotiations. Brent crude is trading around Around $105 a barrel now, while the USWTI is trading around $98 a barrel. Now, to be fair, there's still a ton of uncertainty here on how these talks will play out. There's been some reports that the U.S. will begin heavy attacks on Iran again after the midterm election, so we'll have to see. Beyond that, the market is keeping an eye on earnings. Earnings season rolls on. We have AMD reporting after the close today, so we'll see if they can bounce back from their brutal October sell-off. And then Uber and McDonald's also report tomorrow morning before the bell, so we'll break down those earnings on tomorrow's episode. Along with everything else happening in the markets. So definitely get subscribed if you haven't already. And by the way, thank you to everyone that took the time to vote in yesterday's Spotify poll. We really appreciate that. And if you haven't voted yet, well, today is election day. So if you have a few extra seconds, consider voting in yesterday's poll. You know, that really does help us out. Let's run through some headlines. Starting with Apple. Apple reported earnings last night. It was the first earnings report under new CEO John Turner. And at first glance, the numbers looked pretty solid. Apple's revenues grew about 12% to $114.5 billion, coming in slightly ahead of expectations. And earnings per share came in at $2.10 versus the $1.99 expected. Although about five cents of that came from tariff refunds. The iPhone did the heavy lifting with sales up 17% to $57.6 billion, which was about a billion dollars better than expected. And Mac sales jumped 24%, which also beat expectations. Apple services business grew about 10%. That includes things like the App Store and iCloud. That did beat expectations, but growth is decelerating. And outside of that, there were some concerns. The iPad and wearable revenues fell for the quarter. Sales in greater China also disappointed. They grew 21%, but came in more than a billion dollars below estimates. But I think the biggest issue to come from the earnings report was Apple's gross margins. Gross margins is basically how much of every dollar Apple keeps after the cost of making its products. In the second quarter of this year, gross margins were above 50%. But in the third quarter, margins came in at forty seven point nine percent. And in Q4, Apple expects margins to come in between forty five and forty six percent. So the margins continue to get squeezed. And the main reason for that is higher memory prices. You know, memory continues to get more expensive because of the shortage caused by the A.I. build out. CEO John Turner's called memory pricing unprecedented. And he warned that costs will keep rising next year. So the market seems to be freaked out about that. Apple stock fell more than 3%. Following their earnings report, you know, Apple has already raised prices on most of their products this year, including a hundred dollar increase on the iPhone. But even after charging customers more money, that hasn't been enough to absorb the higher cost of memory. Now, the good news for Apple is that the higher prices hasn't resulted in a pullback in demand. The company expects revenues in the holiday quarter to grow about seven to 10 percent, way ahead of the six point one percent that analysts had expected. Not to mention their new two thousand dollar Foldable iPhone Duo is selling so fast that if you were to order one today, Today, it wouldn't be delivered until January. So people are still buying Apple products. That's not the problem. The problem for the company is higher costs. And the thing is, I don't see Apple continuing to raise prices. So they could continue to see their margins get squeezed in the short term. And that brings me. To Apple's valuation, the Apple stock has been the best performing Mag Seven stock this year. In fact, it's the only Mag Seven stock that's outperforming the S and P because it was the only big tech company, not spending a ton of money on AI as the market started getting nervous about the AI trade, investors started jumping into Apple, almost as a safety net. Apple has kind of become like the anti AI play. The problem though, is that the stock has now gone up so much that it's starting to look pretty expensive. Apple currently trades at around 36 times next year's earnings, even though those earnings are only expected to grow about 1%. So when a stock trades at those multiples, any signs of weakness like margins getting squeezed can make investors nervous. And I think that's a big part of why Apple stock is taking a hit today. Let's shift gears and talk about Palantir. Palantir posted another monster quarter last night, but despite that, the stock is getting hammered this morning down around 8% in pre-market trading. The numbers from the earnings report were great. Revenues nearly doubled to $2.31 billion. In fact, this was Palantir's first quarter with revenues above $2 billion. And it came in well ahead of the $2.18 billion expected. And adjusted earnings per share came in at 44 cents, beating the 41 cents expected. So the company beat on top line and bottom line. And a notable milestone for the company was that U.S. commercial revenue jumped 148% to $984 million, passing the U.S. government business for the first time ever. You know, Palantir kind of made a name for themselves making software for the government. But now they're seeing a ton of demand from the enterprise side. Their software helps governments and businesses analyze their data using AI. Palantir is a great example of AI actually being adopted and implemented for real-world use cases. So given all of that, why is Palantir's stock still down nearly double digits this morning? Well, it's because growth is starting to slow down. Palantir's quarter-over-quarter growth is expected to be 15% in Q4. Versus the 20% we just saw in Q3. Not to mention the value of new deals the company closed dipped from $3.4 billion down to $2.9 billion. And this also goes back to valuation. Palantir still trades at like 80 times forward earnings. At that multiple, any signs of slowing growth Can make investors nervous. And I think there's also a question about whether the AI labs like Anthropic and OpenAI could pose a threat to Palantir's business. CEO Alex Karp says he doesn't see them as a direct competitor right now, but I'm sure those companies will keep expanding into new business areas once they go public. So yeah, it's been a pretty disappointing year for Palantir. The stock is pretty much flat on the year. It still seems to be a very fast growing business, but there might not be that much upside left in the stock. Let's talk about some stocks making moves today. Ferrari stock is moving higher this morning after they beat on earnings and raised their full year forecast for the second quarter in a row. Q3 revenues jumped 7% to 1.9 billion euros, and Ferrari now expects about 7.65 billion euros in revenue for the full year. And here's the wild part. Ferrari actually shipped Fewer cars. Through the first nine months of the year, they delivered 318 fewer cars than last year, mostly because of fewer shipments to the US and China. But the customers that are buying Ferraris are paying more to personalize them. On top of that, Ferrari also credited better currency moves and their second place finish in the Formula One championship. They said their order books are now stretched into 2028. So I guess that $100 million salary that Lewis Hamilton is getting from Ferrari has totally been worth it. Their stock is up around 3% this morning at the time of this recording. Now, on the flip side, Shopify is getting crushed this morning after reporting a somewhat disappointing quarter. Revenues in Q3 grew 32% to $3.74 billion, but that was just shy of expectation. In fact, Bloomberg says this was Shopify's first revenue miss. Since 2022, the bigger problem for the company, though, might be their gross merchandise volume, basically the total value of everything sold on their platform. It grew 29% to $119.1 billion. That also fell short of estimates, and that growth rate slowed from a 31% growth in the prior quarter. So because of that, the market seems to be freaking out and Shopify stock is down around 15% at the time of this recording. Let's wrap the show with the fun fact. Today is election day in America. And regardless of what happens tonight, it usually is a good thing for the stock market. According to CNBC, the S&P 500 has been higher one year after every single midterm going all the way back to 1982. So So literally 11 of 11 times the S&P 500 has gone up. With the average gain of about 13.7%, and the reason for this is that Wall Street hates uncertainty. Now investors get nervous heading into the vote, but once the vote is over and investors know who's in charge, the market goes back to focusing on things like earnings. Not to mention Congress doesn't really do anything anymore and Wall Street is perfectly okay with the gridlock because that means big changes like taxes and regulations are harder to pass. Now, some people think that 2026 could be different and the win streak could. Could be in jeopardy. One reason for that is that stocks have never been this expensive heading into a midterm election. There's this famous measurement called the Cape Ratio. It basically compares stock prices today to the last 10 years of earnings adjusted for inflation. Historically, the Cape Ratio averages around 20. Right now, it's more than 40. That would be a record for the midterms. The previous midterm record was 33.8 back in 1998, which was during the dot-com bubble. So if you throw in the AI spending jitters, the rising global bond yields, and the fears that the Iran conflict could escalate after the election, the positive post-midterm election streak from the stock market could be facing a serious test this year. Well, all right, guys, that's the rundown for today. Hope you guys enjoyed today's episode. Thank you guys so much for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys back here tomorrow.