On June 19, the Wall Street Journal reported that Apple can afford the memory chips it needs, but now it is becoming more and more difficult for Apple to purchase these chips. This in itself illustrates the seriousness of the current memory shortage and also shows that even one of the world's richest companies will eventually fall into a passive situation.


Cook announces price increase

There has been speculation for months about how Apple would respond to soaring memory chip costs. Now, Apple has finally expressed its attitude: announcing a price increase. Apple CEO Tim Cook told the Wall Street Journal that the company has been trying to absorb "significant increases" in memory prices without passing costs on to consumers, but "this situation is no longer sustainable."

For a company that has long been accustomed to having absolute dominance in front of its suppliers, this is a rare "bow down." Previously, Apple's excellent capabilities in supply chain management allowed it to maintain higher gross profit margins than other mainstream technology hardware manufacturers.

However, the explosive growth in AI demand is crowding out the production capacity of the types of memory chips needed for devices such as PCs and smartphones, driving prices soaring. Market research firm TrendForce said that the price of DRAM memory used in high-end smartphones increased by as much as 83% quarter-on-quarter this quarter.

Lose purchasing dominance

This AI craze is also causing Apple to lose its dominance in the procurement field. Nvidia purchases large amounts of memory for the AI ​​supercomputer systems it designs, and its annual free cash flow this year is expected to exceed Apple's. According to consensus Wall Street expectations compiled by Visible Alpha, Nvidia will generate more than double Apple's annual free cash flow in two years.

Nvidia CEO Jensen Huan said at a conference earlier this year: "We are the only chip company that directly purchases tens of billions of dollars of DRAM from all DRAM manufacturers."


Free cash flow comparison between Apple and Nvidia

This may not sound like something worth showing off, but Nvidia's gross profit margin has now reached about 75%, while Apple's gross profit margin is hovering at 46% or 47%. In addition, Apple's business model also has structural disadvantages compared with other technology giants that purchase large amounts of memory for cloud computing services. Those cloud service companies can treat memory purchases as capital expenditures and gradually depreciate and amortize the cost over the next few years.

In contrast, the memory purchased by Apple is directly included in the cost of sales. Therefore, if the product selling price remains unchanged, a significant increase in component costs will directly compress Apple's gross profit margin. And gross profit margin is one of the indicators that Wall Street analysts pay most attention to. Even though the market has long known about the memory shortage, analysts still expect Apple's gross profit margin to continue to rise. According to consensus market expectations compiled by FactSet, Apple's gross profit margin is expected to exceed 48% this fiscal year, the first time since 1990.


Apple's gross profit margin

Cook declined to say which products would be affected or how much the price increase would be. Bank of America Securities analyst Wamsi Mohan said in a report on Thursday that he had expected iPhone prices to rise by $100, but now he expects iPhone Pro models to increase by an additional $100.

More expensive

But Apple's products themselves are already at a relatively high-end price point, with the average selling price of its various iPhone configurations now exceeding $1,100. Therefore, any significant price increase is likely to weaken demand, which comes at a time when Apple needs to rely on hardware products to drive its AI strategy. At its developer conference earlier this month, Apple revealed that some of its most powerful new AI features launched this year will only be supported on the three latest iPhone models, which already have an average selling price of $1,369.

After excluding debt, Apple has a net cash hoard of $62 billion, which remains an important strength. But at the same time, Apple returns more than $100 billion to shareholders every year through stock buybacks and dividends. Apple's new CEO John Ternus (John Ternus) promised during the last earnings call to maintain "thoughtfulness, prudence and restraint" in the company's financial decisions.


Turnus faces test

Even though the unpopular decision to raise prices was taken by his predecessor, the "memory shortage" will still pose a major test for Ternus. Apple is currently the only technology company with a market capitalization of trillions of dollars that has yet to establish a significant foothold in the field of AI. To expand its potential market, more devices with sufficient DRAM are needed to support these AI experiences. However, memory costs are unlikely to fall anytime soon. Deutsche Bank analyst Melissa Weathers said in a report on Wednesday that the DRAM shortage "could continue into 2028 and beyond."

On its last earnings call, Apple announced it would adjust its cash management philosophy and no longer aim to maintain a "net cash neutral level." Bernstein analyst Mark Newman said the change could be an effort to "preserve ammunition" for larger AI investments and could even push Apple into a major M&A deal that it has long shied away from. But just purchasing the memory chips needed to ship the latest products smoothly is already a considerable expense.