Apple’s cost pressures are real, but the growth story is bigger
Despite memory cost inflation being a big deal, it still doesn’t fundamentally impact Apple’s tremendous earnings power, Newman shared in a CNBC interview.
That’s not to say he doesn’t expect iPhone production costs to rise, though.
Heightened component costs could push iPhone prices up by as much as 15%, Newman added, while bumping the overall average selling price by nearly 12% as some customers trade down to cheaper models.
Apple's performance in China is often noted and scrutinized. During the last quarterly earnings call Amit Daryanani asked:
... the other second question I have for you is maybe just touch on the China strength you folks had. I think this is very close to all-time high revenues you have had in China. What is driving the strength over here?
To which Tim Cook gave the following answer:
Greater China was up 38% year on year. It was driven by iPhone, where we set an all-time revenue record. So it was the best iPhone quarter in history in Greater China. It is driven by the customer enthusiasm for the iPhone 17 lineup. And I would tell you that during the quarter, traffic in our stores in China grew by strong double digits year over year. It was a terrific quarter. Our installed base reached an all-time high in both Greater China and Mainland China. And we set an all-time record for the upgraders, and we saw strong double-digit growth on switchers.
That's remarkable growth and every quarter we get this sort of discussion. But I don't recall ever there being a similar discussion about Europe. This is strange because, and the following graph shows, Europe is a bigger market for Apple than China.
Europe also grew, and at 12.7%, grew faster than the Americas and faster than Japan.
Regional Sales CQ4
2025
2024
Growth
Americas
58,529
52,648
11.2%
Europe
38,146
33,861
12.7%
Greater China
25,526
18,513
37.9%
Japan
9,413
8,987
4.7%
Rest of Asia Pacific
12,142
10,291
18.0%
So why is Europe not discussed. Management does offer some mentions:
In July this of this year Asymco turns 17. In April of this year Apple turns 50.
This means that Asymco has been following Apple for one third of its life. I regret that it has not been for longer but oh, what a third it has been.
During 2009, Apple Net Sales were $46.7 billion. 17 years later revenues should comfortably top $500 billion.
Earnings per share (split-adjusted) in 2009 were 37c. This year EPS will be around $9.5.
Most importantly, at the end of 2009 Apple had about 107 million active devices (43 million Macs, 33 million iPhones and 30 million iPods!) Today it has 2.5 billion.
The increases in multiples:
23x Active devices, or a compounded annual growth (CAGR) of 20%
11x Revenues, CAGR of 15%
26x Earnings, CAGR of 21%
Apart from the customer love affair these numbers reveal, investors were awakened. 36x increase in Apple share price, from $7.5 to about $270. That’s 17 years of 23.5% growth.
The appreciation of the share price faster than the other underlying metrics reflects the undervaluation that existed for most of the last 17 years. Its value grew a lot more because it was too cheap to begin with.
That was perhaps my most important observation. A recurring undervaluation reflecting a perceived fragility. The more I studied and came to learn how the company operates the more I realized that the perception was wrong. It was in fact the opposite of reality.
When I started my “Apple model” in 2009 I did it out of indignation. I had access to a few analyst reports covering the company and, when looking at their forecasts and assumptions, I was shocked to read that they treated Apple as a computer company. Two years had passed since the iPhone launched and I had made the radical assumption that the future of the company would be determined by the dynamics of phones--later to be broadened into “devices.” This did not appear radical to me because five years earlier Apple had created the market for music players. A market it came to dominate. It seemed very rational to me that with the iPod (and iTunes), Apple had demonstrated that it was more than a computer company. Or perhaps more accurately, it was so profoundly different as a computer company that it redefined what computers were. Nonetheless, observers seemed stuck with the perception that once a PC maker, always a PC maker.
So here is my prediction today: Apple at 50 is no less capable than Apple at 20. Indeed, it is more so. This is because, even if it has not yet completed its quest, the company has sought self knowledge. A knowledge which I have sought to gain as a distant observer.
And so here I am, inviting you to come along with me on this journey.
Asymco is being re-launched. Apple at 50 is entering a new era. It has transitioned from Apple ][ to Mac to iPod, iPhone, iPad, Watch and Spatial Computing. But it has always been the company that brought computers to people and people to computers. The new era of computers that appear more like people is dawning and the connection between the two needs to be built. Only Apple is capable of creating this connection. And only Asymco is able to tell the asymmetric story of how it will happen.
Let’s learn together.
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Apple's iPhone continues to be incredibly popular with U.S. teens, according to Piper Sandler's latest biannual teen survey. 88 percent of teens surveyed said that they own an iPhone, and 88 percent said they intend to purchase an iPhone as their next device.
Teen iPhone ownership numbers have increased three percent since April 2024, and are near record highs. The iPhone has long been the most popular smartphone among teens in the United States, and there has been steady growth in teen ownership. 10 years ago in April 2015, 66 percent of teens surveyed owned an iPhone.
Though teen interest in the iPhone is high, other Apple products and services are not as popular. Apple has not made inroads with Apple TV+, and it continues to trail Spotify as the most popular music service among teenagers.
45 percent of teens surveyed have a paid Spotify subscription, while Apple Music is the second most popular streaming service with 30 percent of teens reporting an Apple Music subscription. Because Spotify has a free tier, it's still the most popular service overall, with 65 percent of teens using it. Apple TV+ is not popular with teens, and less than one percent say they watch Apple TV+ shows. Netflix and YouTube were most popular with 31 percent and 26 percent of teens reporting usage, respectively.
Approximately 31 percent of teens own a virtual reality device, but most of those have an Oculus (25 percent). Just one percent of teens have an Apple Vision Pro, which is not a surprise given the price of Apple's device. Of teens that have a VR device, 60 percent said that they seldom use it, with just four percent reporting being a frequent daily user.
Piper Sandler surveyed 6,455 teens across 43 states for the spring 2025 report.
This data was collected in the spring of last year.
I found the above in my archives. Ownership in 2010 was about 18%, 2015 it was 66% and 2025 it was 88%. The saturation at 88% (for both ownership and intent) was achieved relatively quickly but most importantly, it remains steady.
Now consider that the teens of 2007 are having kids of their own. A 15 year old in 2007 is now 34 and a 19 year old is now 38 and some have a teen of their own.
At 19 years, the iPhone brand has transitioned across one generation with not only resilience but with deeper entrenchment. This cannot be said for other contemporary technologies, e.g. social media. While elders use Facebook the young have moved on. Perhaps to Instagram (25-34, 76% 18-29) or perhaps to TikTok (16-24) which has the strongest position for younger, Gen Z users.
Here are some additional data points on predisposition for social media:
Facebook (25-49): Largest group is 25-34 (31.1%), but also high usage among 30-49 year olds. LinkedIn (30-49): Professional focus, ideal for B2B and adults 30-49. YouTube (18-64+): Broad, with the highest usage (93%) in the 18-29 bracket. Pinterest (30-49): Popular with older, female audiences.
There is quite a lot of divergence and only YouTube seems to be fairly steady across age groups.
Moreover, as the Piper Sandler survey suggests, Apple Services is not the same as the iPhone. The adoption of Music and TV are not a broad-based and that has a lot to do with disposable income. The mechanism for adoption should be the family plan whereby teens are automatically enrolled through their parents in to Music and TV+. After all, teen iPhones are likely purchased by parents. That services bundling is where Apple must focus its effort.
Every major Chinese mobile maker, from Huawei Technologies to Xiaomi, saw major declines in a market that was down 23% overall, largely due to reduced subsidies and a shift in the timing of the Lunar New Year, Bloomberg News reported, citing Counterpoint researchers.
The iPhone 17 lineup, however, helped Apple to 8% growth, raising its share of the market to roughly a fifth, sharing the lead with Huawei. Cupertino, California-based Apple has seen its flagship product stage a major comeback since the September introduction of new models.
“Apple stood out as the only major brand to achieve year-on-year growth, and its market share reached the highest January level in the past five years,” according to the researchers. “The iPhone 17 base version now qualifies for government subsidies, boosting its value-for-money appeal and driving a 9% month-on-month sales increase.”
Despite memory cost inflation being a big deal, it still doesn't fundamentally impact Apple’s tremendous earnings power, Bernstein’s Mark Newman shared in a CNBC interview.
That’s not to say he doesn’t expect iPhone production costs to rise, though.
Heightened component costs could push iPhone prices up by as much as 15%, Newman added, while bumping the overall average selling price by nearly 12% as some customers trade down to cheaper models.
That increase is substantial, and it comes down to a staggering 237% surge in mobile DRAM contract prices since Q2 2025, along with a 70% jump in NAND.
Despite the pressures, Newman feels that Apple separates itself from the pack through its superb execution.
He says Apple is “managing better than competition,” led by unmatched scale advantages, supplier leverage, product mix, and durable pricing power.
To his point, Apple has evolved into a powerful platform company with a walled-garden ecosystem that locks users in.
That matters a ton when costs spike.
That’s why even with the memory pressures in play, Bernstein’s modeling points to iPhone gross margins dropping by nearly 1.5 percentage points by Q4 2027.
Though that’s meaningful, Newman believes the EPS impact will be substantially offset by higher-margin services revenue, mix shift, and aggressive cost management.
Apple’s AI ambitions outweigh rising costs
Newman’s bullish take on Apple centers around AI.
Instead of AI technology showing up just as a chatbot, Newman says Apple is deploying it as a system-level layer, making its ecosystem stickier.
What makes this possible is a hybrid design that handles as many requests on the device and reroutes the heavier ones (advanced reasoning) through Private Cloud Compute using Google’s Gemini.
That robust setup ensures Apple’s privacy positioning remains firmly intact, while delivering cutting-edge responses and features.
Unlike many of its peers, Apple isn’t in the race to win AI benchmarks or translate those gains into tangible financial gains. It just needs those features to change behavior and pave the way for healthier services revenue.
In fact, some of the earlier modeling supports that logic.
Morgan Stanley’s April 2025 survey, as reported by Investing.com, was an early “tell” that Apple’s AI pitch would likely move the needle.
At the time, 51% of iPhone owners said they were “extremely likely” to upgrade in the next 12 months. More importantly, those respondents, compared with those in the previous fall, showed a 12% higher willingness to pay $9.11 per month for Apple Intelligence.
For perspective, the significant Siri 2.0 (the next phase of Apple Intelligence) is reportedly set to launch in spring 2026, according to Mac Rumors.
Ironically, Apple stock was initially blasted for lagging in the AI realm. However, as we’ve gotten deeper into the cycle, Newman argues that investors have actually felt a lot “more comfortable” amid the AI wars.
NB: A 237% surge in mobile DRAM contract prices since Q2 2025 is spot pricing. Apple does not buy on the current market but what is effectively on a futures market. It would behoove the reader to calculate the quantity of orders for e.g. SoC and Memory Apple places vs. hyperscalers. If "51% of iPhone owners said they were “extremely likely” to upgrade in the next 12 months" that's 850 million people worldwide.
GF Securities said a recent survey on the tech giant's supply chain suggests a “solid outlook.”
“Following the earnings call on Jan. 29, 2026, we did a supply chain research which indicates strong iPhone build momentum (incl. 2H26’s models) as well as cost management aiming to keep the starting selling prices of iPhone 18 Pro/Pro Max unchanged or at [a] similar level of iPhone 17 Pro/Pro Max,” analyst Jeff Pu wrote in a note to clients.
“Additionally, [the] Gemini partnership is to work on the Apple foundational model to power the Apple Intelligence, including the personalized Siri, which is the next key to watch in WWDC 2026.”
Pu reiterated his Buy rating and upped his price target [] on the back of higher 2026 and 2027 estimates.
Delving deeper, Pu said the upcoming fiscal third-quarter should see another “strong” iPhone build, with around 54M units, which would suggest a year-over-year acceleration. “For 2H26, we note that Apple is expected to launch 3 new iPhone 18 models (Pro, Pro Max, Fold), compared to 4 iPhone 17 models a year ago,” Pu added. “Yet, we expect a solid iPhone 18 build plan in 2H26 of 82m, compared to 89m of iPhone 17 in 2H25, despite [a] much higher [average] selling price. We attribute the key drivers to the new foldable model and Apple’s strategy of keeping iPhone 18 Pro/Pro Max pricing largely the same as that of iPhone 17 Pro/Pro Max by managing memory/display cost. That said, we expect a significant iPhone ASP increase in CY2H26 driven by mix.”
On the company's recent earnings call, Apple management, led by CEO Tim Cook, said revenue is expected to grow between 13% and 16% year-over-year.
Looking to the cost of the iPhone 18 Pro and Pro Max, Pu said the recent impact of surging memory prices should be manageable. “For DRAM, we believe Apple has been negotiating with Samsung Memory and SK Hynix to reach favorable deals, considering Apple’s support in the past memory downcycle and the likely capital investments,” the analyst explained. “For NAND, we estimate the cost to be up ~70% QoQ in F2Q and suppliers are asking for 50-60% QoQ in F3Q. Overall, we expect the BOM cost of memory to increase from 9- 10% in F1Q to 12-13% in F3Q. To partially offset the cost of memory price and 2nm A20 Pro, we expect efforts on other big items such as display, cameras, etc.”
To own Apple today, you need to believe its ecosystem can keep deepening even as growth expectations are already high and the stock trades on a premium multiple. The latest quarter’s US$143.76 billion in revenue and US$42.10 billion in net income, powered by iPhone 17 demand and a rebound in China, reinforce that story, while expanding AI features and services aim to make each device more valuable over time. The upcoming low cost MacBook fits neatly into this, extending macOS and Apple Intelligence to more price sensitive users without changing the core near term catalysts, which still sit around iPhone 17 uptake, AI rollouts and services momentum. Key risks feel more about execution and sentiment: memory cost pressures, high expectations baked into the price and any cooling of AI enthusiasm..
NB: Another money quote: "An interesting angle is how design-led appeal in China, such as the viral “Cosmic Orange” iPhone 17, combined with new AI features across devices is reinforcing Apple’s ecosystem pull for both consumers and developers."
I tried but failed to connect how Cosmic orange is reinforcing Apple's ecosystem pull for consumers and especially developers.
We are proud to report that we have a new record for our installed base with more than 2.5 billion active devices. -Tim Cook
2.5 billion active devices follows the announcement of 2.35 billion active devices a year ago, a growth of 150 million devices in one year. Let's examine some of the implications.
By my estimate, Apple sold about 250 million iPhones, 23 million Macs, 40 million Watches, 70 million iPads. Other devices including Apple TVs, Apple Vision Pro, Apple HomePods may add another 10 million units. Therefore the total number of "connected" devices sold is around 400 million/yr.
Adding 150 million to the active base in one year implies that 250 million devices are replacements, many surely are reused but also at least a third (37.5%) of units sold are expanding the base. This is reflected by management's occasional mention that "nearly (or, alternatively, over) half of customers who purchased a <product> being new to the product".
In the last quarter and for quite some time, <product> has been the Mac, the iPad and Apple Watch. If we use my estimates of units sold during the full year that means 17 million Macs, 20 million Watches and 35 million iPads were sold to new users. These add up to 72 non-iPhone new devices in use. That suggests about 78 million new iPhone users.
How does this compare to the following pattern:
The line to focus on is the red with square points. "Q Active Devices" is the history of what Apple calls "Quarterly Active" devices or those which ping an Apple server at least once a quarter. The data appears to be linear, or the growth is about 150 million per year at least since 2016. Historic data on the iPhone is also shown with a blue line. That is also consistent with about 100 million new iPhones in use every year. This is a bit higher than the 78 million bottom-up analysis of new users. I'd argue that Watch numbers may be a bit too high and perhaps iPad as well.
The mix is a matter of debate but overall this consistency allows for some confident forecasting.
The iPhone will reach 1.7 billion active users by this time next year.
There will be three billion active devices by early 2029.
Services, which is shown in the second graph is clearly correlated to active device growth.
The consistency in active device growth is far more important than device sales in a particular period and determines the value of the company.
Knowing this, here are some additional observations:
Yearly revenues per active device are $129, services revenues per active device are $45 for a total revenue per active device at $174/device/yr. That is equivalent to 48c/device/day. Data shows that daily revenues have been an average of 53c/device/day for 59 quarters. My rule of thumb is 50c/day per active device is a good estimate for Apple's revenues, and estimate that I have been holding for over 14 years.
There are additional implications. With a base of 1.65 billion iPhones, and knowledge of replacement vs. new-to-product/switcher growth what is their average lifespan and thus replacement rate and therefore what is the average selling price?
While the commentariat assumes the worst, Apple delivers the best.
Last quarter Apple delivered a gross margin of 48.2%. This was above the high end of their guidance range and up 100 basis points sequentially. Management commented that this was "driven by favorable mix and leverage."
Further, products gross margin was 40.7%, up 450 basis points sequentially, driven by favorable mix and leverage. Services gross margin was 76.5%, up 120 basis points sequentially, driven by mix.
This performance is even more astonishing considering the history shown below. Apple is quite simply, delivering at the highest gross and net margins in its history.
Note that the graph actually projects forward one quarter because we have the following guidance: "We expect gross margin to be between 48-49%." The graph reflects the high end of this guidance range.
So what's going on? Especially as a drumbeat of constant doom is being broadcast by pundits. The conference call itself seemed to be dedicated to margins. It became what I call the Margin Call.
Amit Daryanani, the first questioning analyst, specifically kicked off with the following:
"there is a lot of focus on the impact of memory to host the companies, and I would love to kind of get your perspective when you are first guiding gross margins up into March. Talk about, a, your comfort in securing the bit that you need for shipment and b, how do we think about memory inflation flowing through Apple's model over time?"
Tim Cook answered:
We are currently constrained, and at this point, it is difficult to predict when supply and demand will balance. The constraints that we have are driven by the availability of the advanced nodes that our SoCs are produced on. And at this time, we are seeing less flexibility in the supply chain than normal, partly because of our increased demand that I just spoke about. From a memory point of view, to answer your question, memory had a minimal impact on Q1. So the December gross margin. We do expect it to be a bit more of an impact on the Q2 gross margin, and that was comprehended in the outlook of 48 to 49% that Kevin gave earlier.
what Apple is saying is that they are constrained by production of silicon but not of memory. They do see some impact in the future but that is included in a guidance of margin expansion.
Analysts still could not believe this, the following exchange soon followed:
Ben Reitzes: So the next question is on gross margin. I am pretty shocked I gotta hand it to you, Tim. I am, you know, that you are able to do 48 to 49. What is really going on there? How are you doing that with this memory, the NAND prices? Is it due to mix that there is a good less hardware and more services? Services and services margins are going up. How are you doing it to keep it at 48 to 49?
Kevan Parekh: Yeah, Ben. This is Kevin. [] Let me start maybe by just reflecting on the Q1 gross margin. I think we talked about the fact that we landed at 48.2%, so just above the high end of the range we provided, [], on the last call. [] if you look at that performance, [], we were up 100 basis points sequentially. We talked about the fact that we had favorable mix. [], as you know, when we have a good product cycle, strong price cycle we are seeing for iPhone, that does lend itself to a bit more favorable opportunity on the [] leverage side.
So we are having a strong iPhone cycle as Tim outlined. And so that also translates itself. So we talked about products sequentially went up by 450 basis points. So I think, in general, I think we are just seeing, [], favorable mix dynamics as well. [], service continues to contribute as well. That business is growing, [], double digits, so that also is a contributor. And I think that, [], if you looked at our guidance, [], we are providing a similar range to where we reported in December. There are going to be a few puts and takes. [], we do expect to see favorable mix in the services.
As you know, when we move from Q1 to Q2, that tends to be the case, and that is partly offset by a seasonal loss leverage. So there will be puts and takes, but again, we feel pretty good about the guide of 48 to 49%, which is similar to the range we reported in December.
Still not enough. Two more questions followed on margin. I will quote one here.
Aaron Rakers: Yep. And then as a quick follow-up, you know, kind of tied to memory, maybe not so much, but part of this current generation iPhone cycle is you clearly deepened some of your own internal silicon capabilities on the device. I am curious if that if we should think about that as a lever and maybe a supportive factor to gross margin that might be underappreciated and any thoughts on where we go from here as far as continual opportunities of internalizing your own silicon? Thank you.
Timothy D. Cook: Yeah. I will let Kevin talk about the gross margin. But in terms of the product, which is at the heart of what we think about in the user, Apple silicon has just been an incredible game changer for us. Starting with iPhone and then on iPad and, of course, the Mac as of a few years ago. And so we believe it is a game changer and a major advantage.
Kevan Parekh: Yeah. And as far as impact on gross margin, yeah, we have been, as you know, investing in core technologies like our own silicon and our own modem. And certainly, while those do provide opportunities for cost savings and can be plugged in margins, they also importantly provide, [], the differentiation that is really important for our products as well and us more control of our roadmap. So I think there is a lot of strategic value to it, but also we are seeing, [], investments in our core technologies impacting, [], gross margin in a positive way.
After all this, the financial commentariat continues to assume that Apple will be hit with margin pressure from memory and that has presumably been affecting the share price since the call.
Well, we've seen all this before. Before the great memory crisis Apple was going to be constrained by tariffs, by China, by developer dissatisfaction, by AI, by regulators, etc.
The feeling one gets is that Apple is always navigating through a minefield of pitfalls and gotchas. The opposite is true. It's highly likely that Apple has sufficient leverage which increases its access to supply and that everyone is keen to work with the company. Leverage comes from scale, from lead time, from vertical integration and from engineering. Management is saying as much. Indeed, the evidence of leverage across the supply chain and over the entire ecosystem and economy is evident in its margin expansion story told in the graph above.
My predicted growth is in the light blue column, the reported growth is in the grey column and my errors are in the last column. Also included is the guidance from the previous quarter's conference call.
The table shows my errors were primarily in underestimating iPhone, while over-estimating Mac and Wearables. The errors mostly cancelled each other out on the top line (off by 3 percentage points) but, due to an underestimation of the gross margin led to a bottom line error of 5.8 percentage points.
The Mac overestimation was based on not paying enough attention to the comparable from the year earlier. I was warned: "On Mac, keep in mind, we expect to face a very difficult compare against the M4 MacBook Pro, Mac Mini and iMac launches in the year ago quarter". Wearables are similarly underperforming due to lack of new product launches.
But the iPhone underestimation is simply because the new products are a massive hit. Nobody predicted this level of performance. Indeed Apple was caught by surprise and has been unable to meet demand. They are still going to be below supply/demand balance going well into the first quarter of 2026.
Finally, an error on the margin came from Apple's continuing over-performance on supply chain management.
Apple is providing the following guidance [my emphasis]:
We expect our March total company revenue to grow by 13% to 16% year over year, which comprehends our best estimates of constrained iPhone supply during the quarter.
We expect services revenue to grow at a year-over-year rate similar to what we reported in December. We expect gross margin to be between 48-49%. We expect operating expenses to be between $18.4 billion and $18.7 billion, which is at a similar level to what we reported in December and driven by higher R&D on a year-over-year basis. We expect OI&E to be around $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 17.5%.
Based on provided guidance, I'm making the following predictions for the next quarter:
It's vey important to note that Apple is guiding gross margin to be between 48-49%, a record high and something that we will discuss in the next post. This results in a 22% to 23% EPS growth rate!
Note also that Apple guided revenue growth between 10% and 12% and delivered 12.6%. They guided grass margins between 47% and 48% and delivered 48.2%. It's highly probable that their top-of-the-range guidance will also be exceeded slightly and that my current estimates are therefore modest. [NB: the guidance is being put forward at the end of the first month of the quarter therefore the company already has booked one third of the quarter and has very clear visibility into the next third.]
