Apple Inc. is set to release its fiscal second-quarter results after U.S. markets close on Thursday (early Friday Beijing time), but investor attention has already shifted beyond the financial figures to two key issues: the strategic direction of incoming CEO John Ternus and the potential impact of soaring memory chip costs on profit margins. The trajectory of these two variables will largely determine whether Apple's stock can overcome its underperformance relative to the broader market this year.
Apple announced last week that current CEO Tim Cook will transition to Executive Chairman, with hardware engineering chief John Ternus officially taking the helm on September 1. This leadership change, announced just one week before the earnings release, has been noted by Ben Reitzes, Head of Technology Research at Melius Research, as a strategically timed move. In a note to investors, Reitzes suggested the pre-earnings announcement aims to focus market attention on what is expected to be a strong quarter with solid fundamentals. Analysts widely believe Cook’s decision to conclude his tenure on a high note aligns with his consistent leadership style.
Wall Street anticipates Apple will report a 19% increase in profit and a 15% rise in revenue. JPMorgan forecasts fiscal second-quarter revenue of $112.7 billion, exceeding the consensus estimate of $109.6 billion, with projected earnings per share of $2.05, above the market expectation of $1.96. However, beyond the revenue figures, gross margin trends and the new CEO's strategic commentary are expected to be the focal points of the earnings call.
**Earnings Expected to Beat, but Buyers Focus on Margins**
According to a JPMorgan research report, Apple's fiscal second-quarter performance is likely to surpass revenue expectations, primarily driven by robust demand for the iPhone 17 series and the recent launch of the MacBook Neo.
JPMorgan projects iPhone revenue to reach $59.5 billion, a year-over-year increase of approximately 27%, surpassing the consensus estimate of $56.7 billion. Mac revenue is forecast at $8.6 billion, also above the market expectation of $8.2 billion. Services revenue is anticipated to be $30.4 billion, largely in line with market forecasts.
JPMorgan notes that while revenue outperformance is already anticipated by buyers, the true test lies in the gross margin performance and guidance. The firm expects a second-quarter gross margin of 48.5%, matching the midpoint of the company's guidance range and slightly above the consensus estimate of 48.4%.
For the third quarter, JPMorgan anticipates a slight seasonal decline in gross margin to 47.6%, consistent with the market expectation of 47.7%. The firm believes Apple's pre-purchased inventory and scale advantages, which secure favorable contract pricing, will enable it to maintain its seasonal gross margin trajectory despite memory cost pressures, thereby boosting market confidence in its resilience.
**Memory Costs as the Key Variable, iPhone 18 Pricing Strategy in Focus**
The sharp increase in memory chip prices represents the most significant cost pressure currently facing Apple.
Bloomberg data indicates the DRAM spot price index has surged over 500% since late August last year. JPMorgan's supply chain research suggests the memory bill of materials (BOM) cost for an iPhone is approximately $65 per unit in FY25, projected to rise to $114 in FY26, and jump further to $228 in FY27. Combined NAND and DRAM costs are expected to account for over $200 of the iPhone 18's BOM cost.
In response to this pressure, JPMorgan's base case scenario assumes Apple will implement a mild mid-single-digit percentage price increase for the iPhone 18, raising the average selling price by approximately $50 compared to a mix-driven baseline scenario, bringing it close to $1,000.
The firm estimates that maintaining current pricing while relying solely on product mix upgrades would impact iPhone gross margin by about 300 basis points, pressuring overall company gross margin by approximately 200 basis points. Under the base case scenario of a $50 price increase, the pressure on iPhone gross margin could narrow to about 30 basis points, with an overall gross margin impact of around 20 basis points.
JPMorgan also highlights Apple's multiple hedging strategies: First, leveraging its scale advantage to reduce non-memory component costs, with non-memory BOM costs expected to decline by about 10% year-over-year in FY27. Second, developing in-house modems to replace Qualcomm solutions, further mitigating the FY27 BOM cost increase.
David Wagner, Portfolio Manager at Aptus Capital Advisors, commented, "The stocks that get hit the hardest are the ones that have margin deterioration. If memory cost pressures persist, it will start to become a margin risk for Apple, and given current valuations, the downside cannot be ignored."
**CEO Transition Raises Questions About Strategic Direction**
John Ternus's appointment as CEO elevates the strategic significance of this earnings call far beyond the financial numbers.
While Ternus has led the development of several key Apple hardware products, his strategic emphasis between hardware and services, as well as his leadership style in a volatile macroeconomic environment, remain unknown. It is currently unclear if Ternus will participate in the earnings call; an Apple spokesperson declined to comment.
Anthony Saglimbene, Chief Market Strategist at Ameriprise, stated, "The real story of this earnings report isn't the numbers; we want to know how the CEO transition will proceed."
Matt Stucky, Chief Equity Portfolio Manager at Northwestern Mutual Wealth Management Company, pointed out that Apple currently trades at about 30 times forward earnings, a significant premium to its 10-year average of around 23 times, and is second only to Tesla in valuation within the tech sector. He noted, "If the new CEO's innovation can provide a growth catalyst, then the optimism is justified and could even push valuations higher; but if the strategy is merely to steadily gain market share and maintain product updates, that's good, but not a game-changer."
JPMorgan maintains an "Overweight" rating on Apple with a December price target of $325, implying about 32 times CY27 estimated earnings and representing approximately 22% upside from the current price of around $266. The firm also cautions that the CEO transition constitutes a company-specific risk, as Tim Cook's unparalleled execution during his tenure has set a very high bar, creating uncertainty about whether the new leadership can maintain this level of performance.
**Elevated Valuations, Acceleration in Growth Needs Validation**
Apple's stock has declined less than 1% year-to-date, while the Nasdaq 100 Index has gained 7.7% and the S&P 500 has risen 4.2% over the same period. This underperformance relative to the broader market highlights valuation pressures. JPMorgan expects Apple's FY26 full-year revenue growth to reach 14.3%, the fastest pace since 2021, but still significantly lower than the tech sector's overall expected growth rate of over 26%.
Meanwhile, Apple's approach to AI differs notably from its peers. Unlike tech giants such as Alphabet, Amazon.com, Meta Platforms, Inc., and Microsoft, which are making multi-billion dollar bets on AI infrastructure, Apple has not yet joined this investment wave, which somewhat weakens the correlation of its stock price with the broader tech sector.
After markets closed on Wednesday, Alphabet's stock surged due to strong cloud computing growth, while Meta Platforms, Inc. was penalized by the market for raising capital expenditure expectations. This divergent performance underscores the uncertainty of returns on AI investments and provides a reference point for Apple's differentiated path.
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