Apple shares are under pressure as the iPhone maker faces a near-term hit to profitability from surging memory costs tied to AI-driven demand. The company also disclosed that it plans to raise prices on iPhone and other devices to offset escalating input expenses, while still flagging further margin compression in the current quarter.
In its latest results, Apple reported gross margin of 50.1% for the fiscal third quarter ended June 27, but CFO Kevan Parekh said that the majority of the quarter’s margin movement was driven by changes in memory costs. For the fiscal fourth quarter, management guided gross margin of 47% to 48%, a forecast that includes tariff benefits.
Key takeaways
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Price move: Apple stock moved after the company’s earnings and guidance, reflecting investor focus on margin resilience.
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Catalyst: Surging memory costs and Apple’s plan to raise device prices amid supply constraints.
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Margin implication: Gross margin is expected to step down in the fourth quarter, with memory costs still rising.
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Mitigants: Management cited actions to offset costs, including pricing and potential tariff-related effects.
What drove the move
Apple’s quarter highlighted the strain being felt across the electronics supply chain as data centers expand AI workloads. According to management comments, the spike in memory pricing has been exceptionally large, described as a “100-year flood” in memory pricing—an event characterized as rare and difficult to anticipate during normal planning cycles.
That cost pressure flowed through Apple’s financials quickly. In the fiscal third quarter, gross margin came in at 50.1%, helped by a two-percentage-point benefit from a tariff refund. Without that benefit, Apple’s gross margin would have been nearer the midpoint of its guidance range and lower on a quarter-over-quarter basis. CFO Kevan Parekh attributed that gross margin movement largely—more than 100% of it—to the change in memory costs, underscoring that the memory cost trend was the dominant factor behind profitability volatility.
Market reaction and guidance signal
For the fiscal fourth quarter, Apple expects gross margin of 47% to 48%, which includes a one-percentage-point tariff benefit. Parekh said the expected decline could be partly offset by reductions in the costs of other components and by current inventory dynamics. Even so, the company indicated that the timing of the memory-cost peak may not yet be fully behind it, pointing to continued downward flow of shipments carrying higher-priced memory as the effects work through the product cycle.
Beyond margins, Apple’s operating momentum remained strong. iPhone sales increased 22% year over year in the third quarter. Management expects growth to cool to the mid-teens in the fourth quarter, while stating that demand remains firm but is constrained by supply. Apple also referenced its multi-year agreement with Broadcom struck during the third quarter, which the company said provides stable supply of certain components and could support cost management.
Why price increases may not fully neutralize memory inflation
Apple said it will raise prices on iPhones and other devices due to memory costs that have risen sharply. While the company noted that some impact has already arrived, it also expects costs to continue increasing during the current quarter. That combination—ongoing cost escalation alongside pricing actions—suggests that Apple is trying to manage margins through both unit economics and procurement/operational levers, but investors may still need to look through near-term profitability pressure.
Memory cost inflation is also not happening in isolation. The bottleneck reflects broader constraints in memory supply globally, driven by data center demand associated with AI deployment. For Apple, the implication is that cost normalization could lag the broader demand cycle, meaning gross margin may stay sensitive until memory prices stabilize and inventory transitions fully play out.
Bigger picture for investors
The immediate issue for investors is whether Apple can protect margins while sustaining iPhone growth as it navigates input cost shocks. The company is signaling it will use multiple tools—device pricing, inventory management, and adjustments across component costs—to limit damage, but its own guidance points to a clearer profitability step-down in the fourth quarter.
At the same time, the iPhone business remains a key offset. Apple’s year-over-year iPhone growth in the third quarter and its commentary on ongoing demand indicate that the company’s challenge is primarily cost-driven rather than demand-driven. If supply constraints ease and memory pricing eventually flattens, margins could stabilize faster than investors fear—though the company’s guidance suggests the peak impact is still unfolding.
Investors will likely watch Apple’s next earnings for confirmation on whether gross margin is holding within the guided range, as well as for any updates on memory price direction and the effectiveness of device price actions. Additional signals from the broader component supply chain and upcoming macro catalysts—especially expectations around interest rates and inflation—may also influence how the market values Apple’s margin trajectory heading into future quarters.
