Key Points
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Apple demonstrated robust growth and strong margins, with iPhone sales up 22% in the third quarter.
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Gross margins were wider in the quarter, but that included a tariff benefit.
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Management expects memory prices to continue rising and is planning price increases to offset some of the impact.
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Tim Cook is finishing his last stint as CEO of Apple (NASDAQ: AAPL). John Ternus will be taking over on Sept. 1, and he’ll be coming in at a challenging time for the iPhone maker. Although the company has been reporting outstanding performance, there are headwinds swirling.
Apple recently announced it will raise prices on iPhones and other devices due to skyrocketing memory costs, and while there’s already been an impact, management expects costs to increase in the current quarter. Should investors be worried about Apple’s margins as it absorbs the rising costs?
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The hundred-year flood
The advent of data centers processing massive amounts of information for artificial intelligence (AI) has led to a huge demand for various types of memory products that are in short supply globally. As the law of supply and demand dictates, this has resulted in soaring memory costs, which is why memory companies Sandisk, Micron, and SK Hynix have been hot stocks.
Image source: Apple.
“I would characterize it as a 100-year flood on the memory pricing, with exponential increases in memory prices,” is the way Cook described the situation. A hundred-year flood is an expression implying a rare event with a low statistical likelihood of occurring. In this context, Cook indicates that it was unexpected, which is why management didn’t account for it earlier in the planning process and why it could affect margins in the short term. Because costs are still rising, the situation is still developing.
Apple is preparing, but the short term could be pressured
In the 2026 fiscal third quarter (ended June 27), Apple’s gross margin was 50.1%. That included a two-percentage-point benefit from a tariff refund, without which the number would have come in at the midpoint of guidance and lower quarter over quarter. CFO Kevan Parekh said that “more than 100% of that can be explained by the memory cost change.”
Management expects fourth-quarter gross margin of 47% to 48%, which includes a one percentage point tariff benefit. Parekh said that the expected lower gross margin may be offset by price reductions for other components and by current inventory. That implies that the peak of the impact might still be on the horizon, as new shipments with the higher-priced memory are still coming down the line.
iPhone sales increased 22% year over year in the third quarter, and they’ve been growing at similar levels for the past three quarters. Management expects growth to decline to the mid-teens in the fourth quarter, and while it says demand remains strong, it’s constrained by supply. Apple struck a celebrated, multi-year agreement with Broadcom in the third quarter that provides it with a stable supply of certain components and may account for some of the reduced costs Parekh alluded to.
Investors should definitely be prepared for margin pressure in the upcoming quarters, but they shouldn’t be worried. Apple is pulling several levers to keep margins steady, and its dominant position in its categories gives it leverage with some of its suppliers. In the long term, Apple is still in great shape as a tech leader.
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Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Apple, Broadcom, and Micron Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
