A Tumultuous Period as Cook Steps Down.

Author I Xue Xingxing

Editor I Jiang Jiao

Cover I Unsplash

While tech giants like Meta and Google face scrutiny over ballooning AI capital expenditures, Apple's lackluster AI efforts have unexpectedly become a highlight.

This week, Apple's market value surpassed NVIDIA to reclaim the top spot globally, with its intraday market value briefly exceeding $5 trillion. Prior to the earnings release, Apple's stock price had surged over 24% year-to-date, the only double-digit growth among the 'Magnificent Seven' stocks.

This is somewhat ironic. Over the past two years, Apple has repeatedly stumbled in the AI arena. Apple Intelligence has faced repeated delays, core AI talent continues to drain away, and the company ultimately had to rely on Google Gemini and Alibaba's QianWen for implementation. In the words of a domestic automaker, this is like surrendering its soul.

However, as peers engage in increasingly exaggerated and blind AI spending wars, investors have begun to panic about whether these investments will yield returns. While Apple lags in AI, it also avoids heavy capital expenditures. Previously criticized for slow AI progress, Apple is now praised for its restraint.

—This is perhaps the so-called 'leading by default,' where standing still can be a form of advancement.

Yet, market enthusiasm didn't last long. On the morning of July 31, Beijing time, Apple released its fiscal Q3 2026 (Q2 calendar year) earnings. iPhone, Mac, and other business revenues significantly exceeded market expectations, driving quarterly revenue up 16% YoY to a record high for the period.

However, Apple's stock price dropped over 8% after hours following the earnings release. Meanwhile, Microsoft, NVIDIA, and Amazon saw notable recoveries. Microsoft surged 15.51% in a single day, while Amazon, which released earnings simultaneously with Apple, also jumped over 10% after hours.

The iPhone Saves Apple Once Again

Judging solely by the current quarter's performance, Apple delivered a stellar earnings report, with multiple metrics hitting record highs for the period. Earnings showed quarterly revenue of $109.417 billion, up 16.4% YoY; net profit reached $29.789 billion, up 27.1% YoY.

Cook proudly announced in a press release, 'We achieved our strongest-ever June quarter performance, with double-digit revenue growth across iPhone, Mac, services, and all regional markets.'

iPhone and Mac once again rescued Apple, jointly contributing about 78% of the quarter's revenue growth and serving as the primary drivers. iPhone revenue surged 21.7% YoY to $54.252 billion, accounting for roughly 63% of Apple's revenue growth. The iPhone's share of total company revenue also rose from 47.4% in the same period last year to 49.6%.

Apple Earnings

Omdia's Q2 2026 global smartphone shipment data revealed that while global smartphone shipments declined 6% YoY, Apple achieved a 23% YoY increase, ranking second globally and setting a record high for the period. In contrast, Samsung's market share grew only 5%, while Xiaomi, OPPO, and vivo saw sharp declines, with Xiaomi's shipments dropping 26% YoY.

Facts prove that despite the rising tide of AI phone marketing narratives, consumers are still more willing to pay for hardware performance and product design. The much-maligned Siri has not hindered iPhone sales.

While Mac's absolute revenue contribution lagged behind the iPhone, its growth rate significantly exceeded market expectations. Mac revenue surged 28.7% YoY to $10.352 billion, 18.4% higher than anticipated. This was achieved despite high-end chip capacity constraints and supply shortages for some Mac products. Apple management previously stated that demand for the MacBook Neo far exceeded expectations, while products like the Mac mini and Mac Studio also saw strong sales driven by AI development needs.

Apple achieved double-digit growth in nearly all global markets. Revenue in the Americas grew 11.1% YoY, Europe and Greater China both grew 22.4%, Japan grew 13.4%, and other Asia-Pacific markets grew 15.6%. However, revenue growth in Greater China this quarter slightly missed market expectations and fell short of last quarter's 28% growth.

Apple Earnings

Beyond iPhone and Mac, Apple's other businesses performed relatively flatly. iPad revenue declined 5.9% YoY to $6.191 billion, the only product line to see a YoY decline, which Cook attributed to high comparison figures from last year's budget iPad. Revenue from wearables, home, and accessories grew 6.5% YoY to $7.883 billion.

Amid strong 18.1% YoY growth in product revenue, Apple's quarterly services revenue reached $30.739 billion, up just 12.1% YoY—below the company's overall growth rate and missing market expectations. For comparison, Apple's services revenue grew 16.3% YoY last quarter.

The slowdown in services growth is partly due to the erosion of the 'Apple tax.' Over the past few years, an increasing number of countries and regions have challenged the App Store's closed ecosystem.

The EU has mandated Apple to open up to third-party app stores, while Epic Games' lawsuit against Apple forced it to allow external payment links in the U.S. In March, under domestic regulatory pressure, Apple reduced App Store commission rates in China.

Services gross margin stood at 75.6%, far higher than the 40.1% for product businesses. The slowdown in services growth somewhat impacted Apple's profit performance. Apple's gross margin was 49.3% last quarter and about 48.1% this quarter after accounting for tariff refunds, representing an actual sequential decline of roughly 1.2 percentage points.

However, Apple's services revenue may grow with the rollout of the new Siri. Apple's AI-enhanced Siri and Apple Intelligence are set to debut next quarter. Cook hinted during the earnings call that some AI features may require paid subscriptions due to rising computing costs.

Dodged AI Spending, But Not AI Price Hikes

While Apple delivered a strong quarterly earnings report, the market reacted pessimistically. Apple's stock price plummeted over 8% after hours following the earnings release.

The direct trigger was Apple's pessimistic guidance for next quarter. Apple expects revenue to grow just 9-11% YoY next quarter, below market expectations. Apple management stated during the earnings call that beyond exchange rate fluctuations, the negative impact of supply chain tensions will worsen quarter by quarter after Q3, adversely affecting iPhone, Mac, and iPad businesses.

Cook noted that supply chain constraints are primarily concentrated in the Mac product line, stemming from extremely strong market demand that outpaces production capacity. 'We will face significant supply chain pressure next quarter,' he said. Apple's M-series chips are primarily manufactured by TSMC, but TSMC's capacity is increasingly being allocated to AI chips.

Prior to this, Apple had already been forced to raise prices significantly due to rising memory and chip costs, affecting many product lines including Mac and iPad, with some prices increasing by over 3,000 yuan. Cook described the current memory price hikes as a 'once-in-a-century flood,' showing exponential growth, necessitating price adjustments.

However, the previous price hikes did not include Apple's most critical iPhone product line. Outside observers expect Apple's upcoming iPhone models this fall to see substantial price increases, with the foldable iPhone potentially starting at over $2,000. Last quarter's strong iPhone sales may have been partly driven by panic buying ahead of price hikes—traditionally, Q2 is a slow season for iPhone sales ahead of new model launches.

Under price hike pressures, market confidence in next quarter's iPhone sales is low. Apple management guided for just around 15% YoY iPhone revenue growth next quarter, below Wall Street's 17.6% expectation.

Apple is already preparing for worsening supply chain tensions. This quarter, Apple's inventory rose to $11.092 billion from $6.747 billion last quarter, a 64.4% sequential increase and an 87.2% YoY jump from $5.925 billion in the same period last fiscal year, nearly doubling.

According to Bloomberg, Apple is negotiating with ChangXin Memory and Yangtze Memory for memory chip procurement. However, this move faced opposition from the U.S. government and Micron Technology. Cook stated during the earnings call that the global DRAM market is currently dominated by Samsung, Micron, and SK Hynix, and adding suppliers would help improve supply and pricing.

While Apple has avoided AI spending sprees, it cannot remain unscathed in the AI frenzy. Record-breaking AI data center construction by Microsoft, Google, Amazon, and Meta will directly impact Apple's memory and chip supply, leading to revenue setbacks.

Currently, the combined full-year AI capital expenditures announced by Microsoft, Google, Amazon, and Meta alone will exceed $720 billion, far surpassing last year's $455.8 billion. This massive AI investment has directly caused Google and Amazon to report negative free cash flow for the quarter, while Meta's free cash flow plummeted 91%.

In contrast, Apple's capital expenditures have not only failed to grow this year but have even declined. In the first three quarters of FY2026, Apple's spending on purchasing fixed assets was just $6.799 billion, down 28.2% YoY.

Apple Earnings

Restrained capital expenditures helped Apple achieve a record high for operating cash flow in the same period this quarter, reaching $117 billion in the first nine months of the fiscal year, up 43.1% YoY. Cook, a master of capital management, has not forgotten to save the company money even as he approaches retirement.

This does not mean Apple neglects AI investment. Compared to peers' enthusiasm for investing in AI computing power, Apple's investments seem to flow more into R&D.

This quarter, Apple's R&D expenses reached $11.729 billion, up 32.3% YoY—nearly double the revenue growth rate. In the first three quarters of FY2026, Apple's R&D expenses were $34.035 billion, up 32.5% YoY.

However, such massive R&D investment has yielded few notable AI achievements, representing another form of 'Only Apple can do.'

This marks Cook's final participation in an Apple earnings call. In September, he will officially step down as Apple CEO. Cook expressed gratitude during the call: 'Thank you to all our shareholders, especially our long-term shareholders who have trusted us for years.'

He said he has full confidence that Apple's future is bright.

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