Written by: Rita

Apple's revenue for the third quarter was $109.4 billion, a year-on-year increase of 16.4%, situated in the middle of the management's guidance range of 14% to 17%. However, this surprising result is not very solid. Excluding tariff refunds that contributed $0.11 to earnings per share and about 200 basis points to gross margin, the actual earnings per share were $1.91, only slightly exceeding the market expectation of $1.89. The actual gross margin was 48.1%, landing near the midpoint of the guidance range of 47.5% to 48.5%.

The guidance for the fourth quarter raises more concerns in the market. Apple expects revenue growth for the September quarter to decline to 9% to 11%, a noticeable slowdown from the mid-double-digit growth of the previous three quarters, primarily due to foreign exchange losses and supply constraints. The gross margin guidance is 47% to 48%, and when excluding about 100 basis points of tariff refund benefits, this suggests a sequential contraction of about 160 basis points from the actual gross margin of the third quarter (48.1%), with rising memory costs being the core drag. Bernstein maintained an outperform rating in its research report on July 31, raising the target price from $350 to $370, corresponding to about 33 times the earnings per share for the fiscal year 2028. Bernstein's concern is that memory inflation will continue for several quarters, but Apple's market position is unshakeable.

FQ3 performance gently exceeded expectations, FQ4 guidance below expectations

Third quarter product revenue was $78.7 billion, a year-on-year increase of 18%, surpassing the market expectation of $77.2 billion. iPhone revenue was $54.3 billion, a year-on-year increase of 22%, exceeding the expected $53.6 billion. Mac revenue reached $10.4 billion, a significant year-on-year increase of 29%, far exceeding the market expectation of $8.6 billion. Strong demand for MacBook Neo and MacBook Pro was the main driver. Management specifically mentioned two AI workload use cases for Mac during the earnings call: using Mac mini as a computing platform for AI agents, and deploying Mac Studio clusters to locally run cutting-edge models.

Service revenue was $30.7 billion, a year-on-year increase of 12%, below the market expectation of $31.4 billion. The growth rate slowed from 16% in the previous quarter, with foreign exchange losses, weak mobile gaming, adjustments in the App Store business model, and regulatory changes being the main reasons. Apple set revenue records in every service category, including historic highs for cloud services and payment services. Paid subscriptions exceeded 1.5 billion, and the number of transaction and paid accounts reached record highs, with emerging markets maintaining double-digit growth. Management expects the base revenue growth for services in the next quarter to be roughly comparable to the third quarter (12%), but an additional 2.5 percentage points of foreign exchange losses will bring the reported growth down to about 9.5%. The active device install base exceeding 2.5 billion is a long-term support for the service business.

The gross margin for the third quarter was 50.1%, an increase of 80 basis points sequentially, better than market concerns. However, the contribution from tariff refunds was about 200 basis points, leading to an actual gross margin of 48.1%, resting at the midpoint of the guidance range. The product gross margin was 40.1%, with tariff refunds contributing about 250 basis points. Service gross margin was 75.6%, down 110 basis points sequentially, influenced by changes in product mix. Management confirmed that memory costs continued to rise sequentially in the third quarter and are expected to increase further in the fourth quarter, partially offset by previous inventory benefits and declines in non-memory material costs, though inventory benefits will gradually dissipate after the fourth quarter. Cook described the current memory pricing environment as a "once-in-a-century" flood.

Rising memory costs are the core pressure, with expanding market share for Mac and iPhone

Memory inflation is currently the most direct cost pressure that Apple faces. Management clearly attributed the sequential decrease in the guidance for gross margin in the fourth quarter to rising memory costs. The DRAM industry is still concentrated among three major suppliers, and Apple is exploring the possibility of introducing a fourth DRAM supplier. Bernstein believes that if Apple pursues this plan, the most likely choice would be Longsys Memory, though this move could face political backlash.

Supply constraints are another limiting factor. The limited availability of advanced process capacity is the main reason. Entering the fourth quarter, Apple expects demand to remain strong, but a decreased supply chain flexibility will significantly expand the impact of supply constraints, affecting iPhones, Macs, and iPads.

The good news is that market share is expanding. Bernstein pointed out in a previous in-depth report that Apple is facing a generational market share expansion opportunity, and this trend is occurring. Both iPhone and Mac are continuously gaining shares, and the 29% growth for Macs under constrained supply is the best proof.

Bernstein has lowered the earnings per share forecasts for fiscal years 2027 and 2028 to $10.03 and $11.28, respectively, mainly reflecting the impact of rising memory costs, increased R&D spending, foreign exchange losses, and supply constraints. The earnings forecast for fiscal year 2028 is still about 5% higher than the market consensus.

Bernstein raises target price to $370, reflecting long-term confidence in a 33 times valuation

Bernstein maintains an outperform rating, raising the target price from $350 to $370, corresponding to about 33 times the earnings per share for fiscal year 2028, or approximately 29.5 times EV/FCF. Bernstein admits that memory cost pressure is still rising but believes that Apple's competitive position in consumer electronics is unparalleled, and there remains potential for expansion in iPhone and PC market shares. AI also brings new long-term opportunities for Apple, although this narrative will take longer to realize.

Apple's short-term pressures come from rising memory costs and supply constraints, while the medium to long-term logic arises from market share expansion and AI-driven replacement cycles. Bernstein raises the target price to $370, corresponding to an approximately 11% upside. Memory prices will not remain at the “once-in-a-century” highs forever. The target price of $370 implies a judgment: the market's concerns about short-term memory costs are exaggerated, underestimating the medium to long-term value of Apple’s share expansion and AI replacement cycles.

Disclaimer: This article is an interpretation and synthesis of third-party broker research reports (Bernstein, July 31, 2026) by Chaoxiang Research, combined with public market information. The ratings, target prices, earnings forecasts, and related judgments cited in this article are solely the views of the broker's analysts and represent the position of their respective institutions, not the opinions of Chaoxiang Research, nor do they constitute any investment advice. The market carries risks, and decisions should be made independently. This article should not be used as the basis for buying or selling any securities.