UBS issued a research report maintaining a "Neutral" rating on Apple (AAPL.US) with a target price of $280. Despite Apple being poised to deliver a fiscal Q1 2026 (December 2025 quarter) earnings report that far exceeds market expectations, UBS pointed out that behind the impressive iPhone sales figures, rising memory costs and gross margin risks in the second half of the year are becoming a Sword of Damocles hanging over Apple's head. The market reception for the iPhone 17 series has been exceptionally robust. UBS anticipates that iPhone revenue for the fiscal Q1 2026 (December 2025 quarter) will reach approximately $79 billion, representing a year-over-year increase of about 14%. This surpasses the firm's previous expectation of $77.58 billion and the general market consensus of $78.5 billion. Benefiting from a more premium model mix, the average selling price is expected to rise to around $930. This leads the bank to hold an optimistic outlook for the quarter's performance. This outperformance is primarily attributed to two factors: firstly, the technical specification upgrades of the iPhone 17 have tangibly driven market demand; secondly, against the backdrop of significantly rising memory costs (DRAM and NAND), Apple may have front-loaded production to lock in costs, resulting in a slight pull-forward of sales within the quarter. Consequently, UBS expects earnings per share for the quarter could reach $2.70, slightly above its previous forecast of $2.66. The positive news, however, is not sufficient to fully offset UBS's concerns. The core issue lies in the substantial surge in prices for NAND and DRAM memory. Based on teardown analysis, UBS estimates that memory previously accounted for 8% to 10% of the iPhone's bill-of-materials (BOM) cost, averaging about $50 per device. While Apple, leveraging its strong supply chain relationships and pre-negotiated supply agreements, successfully mitigated the cost impact in the December quarter, the risk is gradually shifting to the second half of fiscal 2026. UBS warns that as production for the new-generation iPhone ramps up to its peak, gross margins in the June and September quarters could face downward pressure of 50 to 100 basis points. UBS therefore expresses concern over its gross margin guidance of 48.0% and 47.8% for the June and September quarters, respectively. Although the higher profit margins on premium models can partially absorb the cost increases, profit compression in the fiercely competitive low-end market will be unavoidable. For the upcoming March quarter, UBS provided more cautious guidance. Total revenue is projected to be approximately $102.9 billion, up 8% year-over-year, which is below the market expectation of $104.9 billion. Due to the "front-loaded shipments" phenomenon in the December quarter, iPhone demand in the March quarter may experience seasonal weakness, with revenue expected to be $50.1 billion.
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