Apple can afford the memory chips that it needs. But the fact that it's getting harder says something significant about the severity of the memory crunch -- and how one of the world's richest companies can still end up at a disadvantage.
After months of speculation about what the consumer-electronics giant might do in the face of soaring costs for memory chips, Apple now says it will be raising prices on its products. Chief Executive Tim Cook told The Wall Street Journal that the company has been trying to mitigate the "huge increases" in memory costs without passing them on to its customers, but "the situation has become unsustainable."
That is a humbling admission from a company long accustomed to running the table on its suppliers. Apple's prowess at managing its supply chain has allowed the company to command superior gross profit margins relative to other major sellers of tech hardware.
But booming AI demand is squeezing out production for the types of memory chips needed for devices like PCs and smartphones. That has sent prices soaring. Market research firm TrendForce says prices for the type of DRAM -- dynamic random-access memory -- used in high-end smartphones will surge as much as 83% in the current quarter compared with three months ago.
The AI craze is also costing Apple its position as the biggest kid on the procurement block. Nvidia, which buys up memory for the AI supercomputer systems it designs, is on track to surpass Apple in annual free cash flow this year. Wall Street also expects the AI chip maker to be generating more than double Apple's annual free cash flow in two years, according to consensus estimates from Visible Alpha. "We're the only chip company that buys directly tens of billions of dollars of DRAM from all the DRAM makers," Nvidia CEO Jensen Huang said at a conference earlier this year.
That might seem like an odd bragging point. But Nvidia's gross profit margins are now in the mid-70% range compared with the high 40% range for Apple. And the iPhone maker's business model also puts it at a structural disadvantage relative to the other tech giants who buy up memory for their cloud-computing services and can thus treat those purchases as a capital expense, depreciating the cost over time.
Apple's memory purchases go directly under its cost of goods sold. So significantly higher component costs can weigh down gross margins if the price on its products stays the same. Those margins are closely watched by Wall Street analysts who expect the number to keep trending up -- despite the well-known memory shortage. Apple's gross margin is expected to top 48% in the current fiscal year for the first time since 1990, according to consensus estimates from FactSet.
Cook declined to specify which products would be affected, or by how much. In a note Thursday, Wamsi Mohan of BofA Securities said he was already expecting iPhone prices to go up by $100, but he now expects an additional $100 hike on iPhone Pro models.
But Apple's devices already occupy a relatively premium tier, with its various iPhone configurations alone now averaging a price tag over $1,100. So any significant price increase runs the risk of hurting demand just as Apple needs its hardware products to drive its artificial-intelligence efforts. At its developers conference earlier this month, Apple disclosed that some of the most powerful new AI capabilities coming out this year will only be available on three of its most recent iPhone models -- which already carry an average price tag of $1,369.
Apple's war chest of $62 billion in cash net of debt is still a major asset. But the company also returns more than $100 billion a year in share buybacks and dividends, while new incoming CEO John Ternus promised in Apple's last earnings call to maintain "deep thoughtfulness, deliberateness and discipline" on the company's financial decision-making.
The memory crunch will still prove a major test for Ternus, even if his predecessor owns the unpopular decision to jack up prices. Apple is the only trillion-dollar tech company without a major foothold in AI now, and growing its potential market will require more devices with enough DRAM to power those experiences. And memory costs won't be going down anytime soon. Deutsche Bank analyst Melissa Weathers said the shortage of DRAM "could persist well into 2028 and potentially beyond," in a report Wednesday.
In its last earnings call, Apple announced a change in its cash-management philosophy by no longer aiming for neutral levels of net cash. Bernstein analyst Mark Newman said this could "preserve dry powder" for larger investments in AI, and even major M&A deals that Apple has long avoided. But just getting the memory chips it needs to get its latest products out the door won't come cheap.
Comments