Despite facing higher costs, Apple's profits are soaring.

Recently, Apple unveiled a financial report brimming with impressive figures. In the third fiscal quarter of FY2026 (spanning from March 28 to June 27), Apple's quarterly revenue soared to $109.417 billion, marking a year-on-year increase of 16.36%. Its net profit climbed to $29.789 billion, up 27.12% from the previous year, with a gross margin exceeding 50%. In the official press release, Cook hailed these results as "a new all-time high for the June quarter." Yet, despite these stellar numbers, Apple's stock price took a 7.35% nosedive. What's the story behind this?

(Image source: Baidu)

For much of the past year, the consumer electronics industry has grappled with the dilemma of rising prices: storage costs are up, chip prices are climbing, and panel prices are soaring. The cost pressure is immense, compelling manufacturers to hike end-product prices. In the Android camp, the quoted price for the Snapdragon 8 Elite Gen 6 Pro has surpassed $300 per unit, while the Dimensity 9600 Pro has reached $216. The costs of LPDDR6 memory and UFS 5.0 flash storage are also high. The combined cost of these three major components for a flagship phone has directly skyrocketed to $600, presenting genuine challenges for phone manufacturers.

On Apple's front, it already raised the prices of most of its hardware products in June, with the iPhone 17 series yet to see a price increase. Supply chain sources suggest there's still room for further price hikes for the next generation of products.

The conundrum is that when we see a financial report boasting a 50% gross margin and net profit growth nearly double that of revenue growth, the argument for "having to raise prices" becomes less convincing. Apple isn't raising prices because it's struggling to survive; it's doing so even as it earns more than ever before.

Costs are indeed on the rise, but Apple's earnings are soaring even higher.

This quarter, Apple's revenue increased by 16.36%, but net profit surged by 27.12%, with profit growth outpacing revenue growth by 1.66 times. The gross margin jumped from 46.49% in the same period last year to 50.06%, a significant increase of 3.6 percentage points. In other words, for every additional dollar Apple earns, more than 50 cents is gross profit, and this proportion is still expanding.

In comparison, Samsung's smartphone business has a gross margin that fluctuates between 35% and 40% over the long term, while Xiaomi's smartphone business has a gross margin of only 12% to 15%. Apple's profit efficiency is several times higher than that of the main players in the Android camp.

In terms of costs, according to the official financial report, Apple's total operating costs this quarter were $54.647 billion, with product costs at $47.153 billion and service costs at $7.494 billion. This translates to a product gross margin of approximately 40% and a service gross margin as high as 75.6%.

In other words, Apple's service profitability is nearly double that of its hardware, and service revenue now accounts for 28% of total revenue this quarter. This means that even if the cost pressure on hardware products continues to escalate, the high profitability of Apple's service business can act as a buffer.

Additionally, the gross margin for Apple's products this quarter was approximately 40%, compared to 34.5% in the same period last year. Despite the overall increase in hardware costs, Apple's product gross margin actually rose by 5.5 percentage points. This is partly due to successful products, such as the better sales of the iPhone 17 series Pro models, which boosted profitability.

(Image source: Leikeji)

Frankly speaking, it's undeniable that storage and chip prices are rising, and memory order prices have indeed increased, with flash storage prices soaring. No matter how large Apple's purchasing volume or strong its bargaining power, it cannot remain unaffected. However, the issue is that the information disclosed in this financial report shows that Apple is still maintaining a profit far higher than that of its competitors. Apple's price hikes are not because, like Android brands, it would incur losses without raising prices; rather, it would earn less without them.

iPhone and Mac witness explosive growth, but concerns linger.

If we delve deeper into the data, we find that the main contributors to Apple's revenue and profit growth this quarter were the iPhone and Mac product categories. iPhone revenue this quarter was $54.252 billion, a year-on-year increase of 21.69%. Mac revenue was $10.352 billion, up 28.66% year-on-year. Together, these two categories contributed $64.6 billion, accounting for 59% of total revenue.

The iPhone 17 series, released last September, has now entered the mid-to-late stage of its product cycle this quarter, but its market performance remains robust. The iPhone 17 series is highly competitive, thanks to features like the A19 series chips, 48-megapixel telephoto lenses, and high refresh rates across all models. At the same time, the accumulated user base from the previous iPhone 12 and iPhone 13 eras is now entering a concentrated upgrade window. Simply put, the impressive data in this financial report is largely attributed to the iPhone 17 series generation of products.

The same can be said for the Mac. The Mac's 29% revenue growth ranks first among all hardware categories and builds upon already decent figures from the same period last year. In the first half of 2026, the PC industry as a whole saw a recovery, with global PC shipments finally increasing after two consecutive years of decline, according to IDC data. Apple captured a larger share of this PC recovery, with the M4 series chips striking the best balance between energy efficiency and AI computing power, making products like the Mac mini, MacBook Air, and MacBook Pro very popular. The fact that the "lobster" craze in the first half of the year directly led to the Mac mini M4 version selling out is just one example.

(Image source: Leikeji)

To be honest, Apple has been somewhat late to the AI PC concept since it gained popularity. However, Mac products are the best carriers for the deployment of AI tools like Agent and Claw in terms of AI computing power cost-effectiveness, energy efficiency, and system compatibility. Apple, the slowest in AI adoption, has reaped AI dividends in this way.

However, not all categories are experiencing growth. iPad revenue this quarter was $6.191 billion, a year-on-year decline of 5.93%. Revenue from wearables, home, and accessories was $7.883 billion, with growth of only 6.47%. The iPad's issues can partly be attributed to its product update rhythm, as there were no particularly strong new products this quarter. At the same time, the iPad's positioning within Apple's product lineup is becoming increasingly awkward, as it is less productive than the Mac and less portable than the iPhone.

Additionally, Apple's performance in the Chinese market this quarter was remarkable. Apple's revenue in Greater China this quarter was $18.816 billion, a year-on-year increase of 22.43%, tying with Europe for the highest growth rate. The smartphone shipment data previously released by Counterpoint, IDC, and other institutions were largely consistent, showing that Apple and Huawei were the only two brands in the domestic market to achieve growth against the trend this quarter.

However, Apple's revenue in Greater China was $15.369 billion in the same period last year and $14.728 billion in 2024. After experiencing continuous weakness in Apple's Chinese revenue, this quarter's figures have returned to a level closer to that of 2023, more like a return to normalcy rather than an explosion. Moreover, the Huawei Mate 80 series is expected to debut in September, and other brands' major products are also on the way, meaning Apple's competitive pressure in the Chinese market has not been alleviated.

The impact of price hikes has yet to fully manifest; autumn and winter will be the real test.

It is worth noting that the period covered by this financial report ended on June 27. The impact of Apple's recent hardware price hikes, service price adjustments in some regions, and rumors of further price increases for the next generation of products will only be reflected in the autumn and winter seasons this year at the earliest. Ultimately, all the growth data in this financial report were achieved before Apple's large-scale price hikes.

The pressure Apple faces in autumn and winter this year is much greater than in the first half of the year. First, there is the issue of product lineup transition. According to the normal schedule, the iPhone 18 series will be released in September. However, supply chain leaks suggest that this year's new products may have an incomplete lineup, with only the iPhone 18 Pro and iPhone 18 Pro Max being released in the autumn 18 series. At the same time, the foldable iPhone Fold may be delayed until early next year. Without the volume-driving iPhone 18 standard model, competition in the smartphone market will be tougher.

Second, cost pressures will increase significantly. As mentioned earlier, this financial report does not reflect the recent increases in component prices. Starting from the fourth quarter, the situation will change. According to a report by Taiwan's Commercial Times, the wafer prices for TSMC's N2P process are still rising, and the quoted prices for LPDDR6 memory from Samsung and SK Hynix are also continuing to climb.

Coupled with rumors that the iPhone 18 series will adopt more complex stacked motherboard designs and higher-specification camera modules, hardware cost increases are certain. Even if Apple can mitigate some of the pressure by having the Pro models bear higher costs and the standard models drive volume, profits will likely decrease.

(Image source: X)

Additionally, management changes have introduced more uncertainty. This is Cook's last time attending the financial results conference, as Apple will soon be taken over by a new CEO. The challenge for the successor will be to find a balance between the new product cycle, pricing strategy, and market share, and whether Cook's supply chain management and pricing strategies built over the past decade can be smoothly continued.

With a net profit of $29.8 billion, a gross margin exceeding 50%, and operating cash flow of $116.9 billion, no consumer electronics company can match Apple's financial strength. However, financial strength does not equate to the ability to raise prices. The global consumer electronics price hike wave in the first half of the year has already left users struggling, with Android flagship phone starting prices generally exceeding $1,000 and mid-range phones also on the rise. If the iPhone 18 series raises prices again, users' willingness to purchase may significantly decrease.

In terms of AI, Apple still faces old issues. At WWDC in June, Apple announced its new AI plan, with increased AI features and capabilities, as well as more comprehensive coverage of its hardware devices. However, the critical issue with Apple's AI landscape remains its insufficient in-house development capabilities, requiring the purchase of Gemini technology solutions to build its AI ecosystem. Now, domestic brands have advanced further in the AI smartphone space, with new categories like AI agent phones and embodied smartphones emerging, meaning the iPhone will face a new generation of competitors.

Overall, Apple's impressive financial report is more like an excellent grade before the full onset of a new round of hardware cost challenges. However, the high gross margin is also depleting consumers' tolerance for Apple product prices.

In our view, the upcoming autumn and winter hardware exams and the intensifying AI terminal wars will be the true tests of Apple's strength. If the upcoming iPhone 18 series merely raises prices without delivering competitive core experiences like AI agents, the high profits earned in the past will have to be returned in the future.