Unprecedented RAM cost increases threaten Apple profit margins, warns CEO John Ternus
Apple is grappling with an unprecedented surge in memory chip costs that is threatening both its profit margins and the availability of its hardware during the critical holiday window. During a recent earnings call, new CEO John Ternus described the current pricing environment for RAM as unprecedented, warning that costs increased in the September quarter and are expected to climb even higher through December and beyond.
This financial pressure is reflected in the company's outlook for the December quarter, where Apple forecasts a gross margin drop to between 45% and 46%, down from 47.9% in the September quarter. While the company noted that some costs related to the ramp of Siri AI are contributing to this decline, the primary driver is the soaring cost of memory. This margin squeeze has already spooked investors, contributing to a dip in share price despite the company reporting overall revenue of $114.8 billion, which beat Wall Street estimates.
The Cost of the AI Boom
The volatility in the memory market is largely a byproduct of the global rush to build out artificial intelligence capabilities. AI server giants and hyperscalers, including Nvidia, are purchasing vast quantities of RAM and are willing to pay a premium to secure it, which has effectively stripped the available supply for consumer electronics manufacturers. This environment has left Apple with less flexibility in its supply chain than is typical, leading to expected supply constraints for both Mac and iPad units during the December quarter.
To mitigate these risks, Apple has aggressively stockpiled components. The company's inventory surged 154.3% year-over-year to $14.54 billion in the fourth quarter. Furthermore, Apple's manufacturing purchase obligations increased by $33 billion between the June and September quarters as the company attempted to secure a steady supply of memory before prices rose further. While these stockpiles helped offset some costs in the September quarter, Ternus noted that the benefit of carrying this inventory will decrease over time.
Supply Chain and Pricing Pressures
The escalating cost of components has already begun to reach the consumer. In June, Apple implemented price increases of up to $500 across a range of MacBooks, iPads, and home devices, while iPhones saw a price hike of $100 in September. CFO Kevan Parekh stated that these increases were made reluctantly, and while COO Sabih Khan avoided giving a direct answer on whether further hikes are coming, the company continues to evaluate its revenue margins against long-term considerations.
These pricing and supply hurdles coincide with a mixed product performance. While iPhone and Mac sales beat estimates—with Ternus noting that Apple has never sold more Macs in a fiscal year than it has this year—iPad revenue fell 10% year-over-year to $6.2 billion, missing analyst expectations. The company attributed this weakness partly to supply constraints. Additionally, the high-end iPhone Duo, priced at nearly $2,000, has faced a difficult launch marred by reports of glitching and cracking screens.
Despite these headwinds, Apple appears to be leveraging its scale to maintain a competitive edge. Citing data from IDC, Ternus claimed that Apple gained global market share for the quarter and the full fiscal year. This suggests that while the memory crisis is squeezing Apple's margins, the company's ability to absorb a portion of these costs may allow it to take market share from Windows PC and Android competitors who lack a similar financial cushion.
The broader implication of this memory crisis is a shift in the hardware landscape where AI infrastructure demand now dictates the cost of consumer devices. If memory pricing remains unprecedented through 2027, the industry may see a permanent shift in baseline pricing for high-performance hardware. For Apple, the challenge will be balancing the "hundred-year flood" of component costs against the need to keep its hardware accessible enough to maintain its current growth trajectory.
