Apple's Margin Warning Shows Who Wins the Memory Chip Squeeze

We’ve already looked at Apple’s quarter and the cash it returns while rivals pour money into AI data centres. The share price told a different story on Tuesday. Apple fell as much as 4% before the open and closed about 2% lower, dragging the Dow down on a day when the Nasdaq rose. The reason was mostly the outlook rather than the results.

On the earnings call, Apple said it expects gross margin of 45% to 46% in the December quarter, down from 47.9% in the quarter just reported. Management blamed most of the drop on one input: memory chips. It also guided services revenue growth to 8% to 9%, below the roughly 10.7% analysts had expected.

“Unprecedented” memory prices

Chief executive John Ternus called current memory pricing “unprecedented.” Apple paid more for memory in the September quarter than in June, he said, and the December quarter will be worse. Beyond December, he expects memory purchase prices to keep rising.

Apple has softened the blow so far in two ways. It bought memory early at lower prices, and some other components got cheaper. But Ternus said the benefit from buying ahead will fade over time. The balance sheet shows how hard Apple has been stockpiling: inventory more than doubled from a year earlier to $14.5 billion, and its manufacturing purchase obligations rose by $33 billion in a single quarter.

Apple has also raised prices on iPhones, iPads and Macs, in June and again in September. Chief financial officer Kevan Parekh said the increases were made “reluctantly.” Asked whether more were coming, management didn’t give a direct answer. Apple also warned that memory shortages will limit supply of Macs and iPads this quarter.

Why memory is so expensive

The cause is the same AI build-out we’ve been following all season. The chips that power AI systems need large amounts of high-bandwidth memory, and memory makers have shifted production toward it because it’s more profitable. That leaves less capacity for the ordinary memory and storage chips that go into phones, laptops and tablets, just as device makers need more of it.

Respondents to Monday’s ISM factory survey described the same pattern from the industrial side: “Any commodity consumed by AI/data centers is in a crunch.”

One company’s cost is another’s revenue

A squeeze like this moves money from buyers to sellers. Micron and Sandisk shares edged higher after Apple’s report, and Micron closed up more than 2% on Tuesday, as Apple’s warning confirmed that memory makers have pricing power over even the largest customer in consumer electronics.

That’s a useful way to think about the AI boom generally. It’s not only a story about the companies building data centres. It also changes costs and prices for businesses that have nothing to do with AI:

• Memory and storage makers gain from higher prices, at least while the shortage lasts. Memory is a famously cyclical industry, and periods of high prices have historically led to new factory investment and, eventually, oversupply.
• Device makers (phones, PCs, game consoles, cars) face higher costs. They can absorb them, pass them on, or cut features. Apple, with unusual pricing power, is doing some of all three.
• Consumers may pay more for electronics, or get less for the same price.

What it means for Apple investors

Two points of gross margin is significant for a company of Apple’s size. On about $480 billion of annual revenue, each point is worth nearly $5 billion a year in gross profit. If memory prices keep rising as Ternus expects, the pressure could last beyond one quarter.

On the other hand, demand looks healthy. The new iPhone Duo is still supply-constrained, and Ternus said Apple can’t predict when supply and demand will balance. A company that is short of product rather than short of buyers is in a stronger position than the margin number alone suggests.

The broader lesson is about where to look in an earnings report. Yesterday’s headline numbers beat forecasts. The market reacted to the guidance, and to a cost that Apple doesn’t control. When reading a company’s results, the outlook section often matters more than the quarter just finished.