Further From the Model Race, Closer to Users: Apple’s AI Logic

Over the past month, Apple's stock price charted a course that first rose and then declined.

From late June to the earnings release, Apple rose by more than 15% cumulatively, with its market value briefly returning to the global top spot; after the earnings release on July 30, its stock price tumbled by nearly 10% intraday on July 31.

While it remains the same company, the way the market calculates its valuation has changed in just a single month.

Before the earnings report, investors were willing to pay a higher premium for Apple's cash flow, hardware demand, and AI growth potential. After the earnings report, the robust growth in iPhone revenue was realized, while Services, supply, and margins left new questions.

Why did Apple regain favor with capital before the earnings report? And why did an earnings report that set a revenue record fail to support the stock price?

Chart 1: Comparison of Nasdaq 100 / S&P 500 / Philadelphia Semiconductor Index / Apple Stock Price Trends over the Past Month (as of August 3)

Source: TradingView

I. From Safe Haven to Recalculating: Why Has the Market Changed?

Before the earnings report, capital bought into both certainty and growth potential

Tech stock trading was highly crowded in July.

Following massive gains in chip and cloud computing companies, the market began to worry about the return velocity of massive AI capital expenditures. While investments in servers and data centers can be quickly deployed, they require enough applications, users, and revenues to ultimately translate into profits.

Apple offered an alternative. The company has not participated in a data center race of the same scale; iPhone and Services generate stable cash flows, and continuous buybacks support earnings per share. Meanwhile, more than 2.5 billion active devices allow Apple to retain room for growth in on-device AI.

Hardware data also reinforced this logic. IDC data showed that while the global smartphone market declined overall in the second quarter of 2026, iPhone shipments still maintained double-digit growth, further increasing its market share. Several institutions raised their target prices ahead of the earnings report, further heightening market expectations for the June quarter.

Apple was able to absorb safe-haven capital within tech stocks while retaining the possibility that AI's entry into consumer devices would drive upgrades and Services revenue. This constituted the primary driver behind the pre-earnings rally.

The September quarter guidance hit the brakes, and capital began to shift sides

In 3QFY26, Apple's total revenue grew by 16%, iPhone revenue grew by 22%, and Mac revenue grew by 29%, all setting June quarter records.

A tariff refund contributed $0.11 to EPS this quarter and boosted gross margin by approximately 2 percentage points. Excluding this impact, we calculate that EPS was approximately $1.91 and the normalized gross margin was approximately 48.1%, closely matching the market's original expectations.

But pressure emerged for the next quarter.

Apple expects revenue growth of 9% to 11% for the September quarter, lower than the market's original expectations. A supply shortage of advanced-node SoCs will limit supply and shipments of iPhones, Macs, and iPads; foreign exchange will act as a revenue headwind, while rising memory prices continue to squeeze hardware gross margins. For Services, management expects growth at constant currency in the September quarter to be roughly equivalent to that of the June quarter, with exchange rates imposing an additional 2.5 percentage point drag. Based on this rough estimate, reported growth could fall below 10%. With Services lacking signals of re-acceleration, it will be difficult to prompt the market to upwardly revise earnings expectations in the short term.

Following the release of the weaker guidance, the market began to downwardly revise revenue and profit expectations for the next quarter.

Capital flows changed at the same time. AI and semiconductor companies regained market attention, and stock prices in related sectors rebounded as a result. Some of the safe-haven capital previously allocated to Apple began flowing back to chip, memory, and cloud computing companies.

The downward revision of earnings expectations for the September quarter weakened Apple's fundamental support, while the reheating of the AI trade compressed its safe-haven premium. The combination of these two forces drove the stock price to pull back after the earnings report.

II. Before the Market Reprices Apple, a Question Must Be Answered: What Kind of Company Is Apple, After All?

The iPhone Still Accounts for Half the Business, Serving as the Gateway to the Ecosystem

When Apple is mentioned, most people's first thought is still the iPhone.

This impression is correct. In the latest 3QFY26 fiscal quarter, the iPhone contributed $54.25 billion in revenue, accounting for 50% of the company's total revenue; Services accounted for 28%, while Mac, iPad, and wearables collectively accounted for approximately 22%.

Chart 2: Apple's 3QFY26 Revenue Structure by Product

Source: Apple

As the mainstay of hardware sales and ecosystem user acquisition, Apple's growth is highly dependent on the iPhone.

Users may first buy an iPhone, then add a Mac for work, purchase an Apple Watch for sports, use AirPods for music, and eventually start paying for iCloud, Apple Music, Apple TV, and various apps in the App Store.

If Apple's ecosystem is likened to a shopping mall, the iPhone is still the door with the highest foot traffic. But what Apple really wants to do, is to have users enter, gradually get used to the payment methods, device connectivity, and service experiences, and ultimately find it hard to find a reason to leave.

Chart 3: Apple's Product Matrix as of July 2026

Source: Apple

Hardware Acquires Users, Services Extend User Value

The shift in Apple's identity is even more pronounced in its profit structure.

In the latest fiscal quarter, the gross margin for the Products business was 40.1%, while the Services gross margin reached 75.6%. Services accounted for 28% of the company's revenue but contributed 42% of its gross profit.

Chart 4: Revenue and Gross Profit Contribution of Apple Products and Services in 3QFY26

While hardware sales depend on new product launches and user upgrades, Services can continuously generate revenue from the same user. As long as users keep using Apple devices, the company has opportunities to provide storage, apps, content, payments, and other services.

In terms of revenue, Apple remains inseparable from hardware; from the perspective of profit structure, it is extending one-off device sales into a multi-year user relationship through Services revenue.

III. Where Will Apple's Next Growth Come From?

For a company with annual revenue exceeding $400 billion, a single product cycle can hardly drive sustained acceleration in overall growth.

Apple has three main lines of business growth: Hardware, Services, and AI; share buybacks further amplify earnings per share.

Hardware Side: A New Wave of iPhone Upgrades Approaches

While the industry declined 4.8% in 1H26, Apple bucked the trend to grow 9.4%.

Rising prices of memory chips first squeeze low-end phones. Memory accounts for a higher percentage of bill-of-materials costs in low-end models, making it hard for manufacturers to absorb it themselves, leaving them with no choice but to respond by raising prices, downgrading specs, or reducing shipments. The iPhone has a higher retail price, making memory costs a relatively lower percentage of the overall device value; Apple's purchasing scale and supply chain capabilities also allowed the company to maintain relatively stable pricing and supply in the first half of the year.

Meanwhile, some Android models saw price increases, while the iPhone still offered channel discounts in markets like China. As the actual price gap narrowed, installment plans and trade-ins further lowered the barrier to purchase. The cost increases thus shifted the relative competitiveness of different brands, allowing Apple to capture more share during the industry contraction.

Chart 5: Comparison of Global Smartphone Shipments and Top Five Vendors in 1H25 vs. 1H26

The year 2025 has ushered in a new upgrade cycle, and the iPhone 17 is the first to capture this demand.

Counterpoint believes that the iPhone upgrade cycle has reached an inflection point in 2025. Users who purchased phones during the pandemic have now been using their iPhones for four to five years, and previously deferred upgrade demand is beginning to return to the market.

The iPhone 17 has arrived just in time to capture these users. Compared to the incremental upgrades of the past few generations, the changes in appearance and product design for this generation are much more intuitive. While users may not immediately feel the difference in AI models, they can tell at a glance that the new phone looks different from the old one. This type of change is more likely to translate into a concrete reason to purchase.

There are two major product catalysts ahead. The foldable iPhone in 2026 will enter a higher price tier, which may attract a cohort of users waiting for a new form factor. Meanwhile, the 20th-anniversary redesign in 2027 offers an opportunity to continue capturing upgrade demand. The consecutive release of two major product changes provides the potential to extend this upgrade cycle through 2027.

Chart 6: iPhone Revenue and Shipments (2007-2027E)

Source: Counterpoint

Apple is simultaneously expanding both ends of its pricing spectrum.

The iPhone 17e, MacBook Neo, and entry-level iPad lower the cost of first-time purchases to attract new users, while the Pro series and the foldable iPhone extend into higher price tiers to drive up the average selling price (ASP). Lower-priced products expand the user pool, while high-end products capture upgrade demand—a combination that forms the primary path for hardware revenue growth over the next two years.

Chart 7: iPhone/Mac/iPad Product Matrix

Source: Compiled from Apple's official website and media reports

Services Side: 2.5 Billion Active Devices and 1.5 Billion Subscriptions Provide the Growth Foundation

Apple disclosed in January 2026 that its active device base has exceeded 2.5 billion, while its latest earnings call revealed that paid subscriptions have surpassed 1.5 billion. This user base provides a ready-made distribution network for iCloud, the App Store, advertising, payments, and content services.

After entering the ecosystem, new users may progressively purchase iCloud, Apple Music, and App Store apps. Existing users may also upgrade to higher iCloud+ tiers as their photos, files, and devices accumulate. Even if hardware sales slow down, the growth of paid accounts and rising spend per user will continue to drive Services revenue.

In the most recent fiscal quarter, Services growth slowed to 12% from 16% in the March quarter, indicating that the device base still needs to be converted into higher paid penetration rates and average revenue per user (ARPU). Moving forward, the key metrics to watch are paid account growth, Services gross margin, and whether businesses outside the App Store can sustain growth momentum.

AI Side: The iPhone Could Become the Most Crucial Gateway for Personal Agents

Over the past two years, AI has primarily answered questions through conversation. As models begin to understand personal information, invoke applications, and execute actions, their role is extending further—moving from providing answers to completing tasks on behalf of the user. Agents are the product of this evolution.

This shift will bring AI out of isolated chat boxes and into daily life. For instance, a user simply needs to say, "Help me plan next week's trip to Shanghai," and the Agent can read calendars and emails, check flights and hotels, call map and ride-hailing apps, and complete bookings through payment accounts.

Completing such tasks requires simultaneously accessing personal information, app permissions, and payment accounts—resources that are largely concentrated within smartphones. Apple controls the iPhone, operating system, on-device silicon, app ecosystem, Apple ID, and payment systems. While external models can supplement reasoning capabilities, Siri understands the user's context, calls different apps, and executes tasks. This hardware-software integration capability positions Apple to capture a critical entry point for personal Agents into daily life.

This path is still in its early stages. The execution stability of the new Siri, third-party app integration, and user authorization will determine the usage frequency and commercial value of Agents. Potential revenue could come from device upgrades, higher iCloud+ tiers, app store commissions, and payment services. With Apple's active device base exceeding 2.5 billion, once personal Agents enter high-frequency use cases, they can rapidly reach a massive user base.

Share Repurchases Continue to Amplify Earnings Per Share (EPS)

Share repurchases serve as a crucial amplifier of Apple's earnings per share.

Based on cumulative cash flow data, Apple's operating cash flow for this quarter was approximately $34.37 billion, capital expenditures were about $2.46 billion, and simplified free cash flow was approximately $31.91 billion. Meanwhile, cash used for share repurchases during the same period was approximately $25.11 billion.

Apple's ability to maintain large-scale share repurchases while increasing R&D investments is also a key source of its earnings stability and valuation premium.

IV. Two Key Challenges Ahead Need to Materialize

With Rising Prices, Are Users Still Willing to Pay?

On June 25, Apple raised prices across 14 product categories, including Macs and iPads: the MacBook Neo increased from $599 to $699, the 13-inch MacBook Air rose from $1,099 to $1,299, and the base model iPad went from $349 to $449, representing increases of approximately 17% to 29%. No pricing adjustments have been made to the iPhone for now.

Chart 8: Price Adjustments for Apple's Three Major Product Categories on June 25

Source: Apple's official website Global Price Adjustment Announcement on June 25, 2026

The price adjustment occurred just two days before the end of the fiscal quarter, resulting in a limited impact on June quarter revenue. The September quarter will be the first to relatively fully reflect the post-hike demand changes. Since Apple does not disclose unit sales or individual gross margins for Mac and iPad, assessment must be made by combining product-level revenue, third-party shipment data, channel discounts, and overall product gross margins.

The pricing of the iPhone 18 is equally crucial. It will reveal how much storage cost Apple is willing to pass on to consumers, as well as how the company plans to balance market share against hardware profit margins.

Can Siri expand beyond Apple's own apps?

The new version of Siri is currently in developer and public beta phases, with the official version expected to roll out to general users in the fall. Features showcased by Apple include reading personal information such as emails and photos, as well as invoking certain system and app functionalities.

Once these capabilities are fully opened, three key indicators will need to be monitored:

• The scale of third-party app integration;
• The completion speed and stability of cross-app tasks;
• The extent to which AI features drive device upgrades and iCloud+ subscriptions.

Only after large-scale developer integration will Siri's use cases have the chance to expand to booking tickets, hailing rides, shopping, and productivity. Apple has not yet disclosed active AI users or usage frequency, so in the short term, clues must still be sought through device sales, developer adoption, and service subscriptions.

V. What Could Go Wrong?

Hardware is selling, but supply and storage costs are squeezing margins

iPhone and Mac revenues grew by 22% and 29% respectively this quarter, showing that hardware demand remains strong. The upcoming pressure will stem from supply and costs: constrained capacity in advanced nodes used for Apple's SoCs will limit iPhone, Mac, and iPad shipments, while rising storage costs will directly erode profit margins on each device.

The midpoint of the normalized gross margin guidance for the September quarter is approximately 46.5%, down about 160 basis points from this quarter. Apple already raised Mac and iPad prices at the end of June to recoup some costs, but the price hikes will also test consumers' willingness to upgrade. In the coming quarters, the hardware business must simultaneously defend sales volume, average selling prices (ASPs), and product gross margins.

App Store growth faces pressure, Services profit quality put to the test

Services revenue grew 12% this quarter, slowing significantly from 16% in the previous quarter; gross margin fell to 75.6%, down 110 basis points quarter-on-quarter.

Management confirmed on the earnings call that weak demand for mobile gaming affected App Store performance. Although App Store revenue still set a record for the June quarter, this business primarily relies on commission revenue and has low marginal costs; its slowing growth could weaken the contribution of Services to overall profit margins.

Cloud services, advertising, and payments can continue to support Services revenue, but cost structures vary across different businesses. In the coming quarters, both the services revenue growth rate and the gross margin of around 75% will need to be monitored.

Regulation is weakening Apple's control over services revenue

US and European regulators continue to push for the opening of external payments, third-party app distribution, and system entry points. A US court ruling on external link transactions and adjustments to the App Store fee model in certain countries have already begun to impact the revenue Apple generates from app transactions.

The Google search partnership is also facing antitrust scrutiny. While Apple's device users remain within its ecosystem, the company's revenue from payments, app distribution, and default search access may gradually decline. The impact of regulation on Services has already begun to manifest in the financial data.

VI. Is Apple Expensive Right Now?

To jump to the conclusion: the post-earnings pullback has eased valuation pressures, but Apple is still not cheap.

As of August 3, Apple closed at $303.42, with the FY2027 consensus EPS estimate at $9.67, representing a forward P/E ratio of 31.4x. This is a noticeable drop from approximately 35x before the earnings release, but it remains at the higher end of Apple's historical forward valuation range over the past five years.

This premium has a solid foundation. Apple holds a leading share in the premium consumer electronics market, boasts over 2.5 billion active devices, high-margin Services, and stable cash flows; moreover, its hardware, operating system, app permissions, and payment system keep these users locked within a single ecosystem. Such earnings quality and ecosystem control are difficult to measure with the valuations typical of standard hardware companies.

Before the earnings report, the market paid for both certainty and room for imagination; post-earnings, the softer guidance refocused the valuation on earnings. The stock price has priced in some of the optimistic expectations, but a 31.4x P/E still requires Apple to deliver steady growth in FY2027.

Apple remains further from the model race and closer to the user, which continues to be its most scarce positioning. Ultimately, how much replacement demand, subscription revenue, and AI revenue its 2.5 billion devices can generate will determine whether the current valuation premium can be sustained.

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