Single-quarter performance hits a new high, but Apple faces a "sweet dilemma": not enough chips

As iPhone sales exceeded expectations and experienced a surge, the capacity bottleneck of advanced process chips became apparent. Coupled with the continuous rise in storage chip prices, the market is concerned that Apple will face dual challenges of supply constraints and rising costs in the upcoming second fiscal quarter.

On January 29th, after the US stock market closed, Apple released its Q1 FY2026 earnings report (for the period ending December 27, 2025). The financial report shows that Apple achieved total revenue of $143.756 billion this quarter, a 16% increase compared to $124.3 billion in the same period last year. Net profit reached $42.097 billion, a year-over-year increase of 15.9%. Diluted earnings per share were $2.84, up 18.3% year-over-year. Not only did key financial indicators fully surpass Wall Street expectations, but they also set a new quarterly record since the company’s founding.

Driven by strong demand for the iPhone 17 series, Apple’s mobile phone business revenue reached $85.269 billion, a significant increase of 23% year-over-year, with its revenue share rising to nearly 60%. Apple CEO Tim Cook stated during the earnings call that the company achieved its best quarterly performance in history. He emphasized that driven by unprecedented market demand, iPhone revenue in major global markets has broken records, and the company’s active device install base has surpassed 2.5 billion units.

However, as iPhone sales exceeded expectations and surged, the capacity bottleneck of advanced process chips became evident. Coupled with the continuous rise in storage chip prices, the market worries that Apple will face dual challenges of supply restrictions and rising costs in the upcoming second fiscal quarter. Meanwhile, Apple’s strategic path in artificial intelligence (AI) is becoming clearer. After the collaboration with Google Gemini surfaced, it marks that this tech giant has found a new balance between a closed ecosystem and open cooperation.

Strong Recovery in Greater China

A major highlight in Apple’s quarterly report is undoubtedly the rebound in Greater China.

The report shows that Apple’s first fiscal quarter revenue in Greater China reached $25.526 billion, a substantial increase of 38% compared to $18.513 billion in the same period last year. This growth rate not only leads among all major global markets but also clears the haze of sluggish growth that Apple faced in Greater China over several previous quarters.

“Our performance this quarter has been outstanding. The installed user base in Greater China and Mainland China has reached historic highs, and the number of users upgrading from older devices has also set new records; at the same time, the number of switchers from other platforms has also achieved strong double-digit growth,” Cook said. Thanks to the competitiveness of the iPhone and positive consumer feedback, the iPhone has returned to the top three in sales in Chinese urban areas. Foot traffic in Apple stores increased by double digits last quarter. “I am extremely satisfied with the recovery momentum in the Chinese market and our excellent performance this quarter.”

According to market research firm IDC, China’s smartphone shipments in Q4 2025 were approximately 75.64 million units, a year-over-year decline of 0.9%. Among them, Apple ranked first with 16 million units shipped, a 21.5% increase year-over-year.

Not only smartphones, but other Apple hardware products also performed well in China. Cook stated that in Chinese urban areas, iPads remain the best-selling tablets, with half of buyers being first-time purchasers, demonstrating Apple’s continued appeal to new users within its ecosystem. Although Mac sales declined 7% year-over-year globally due to high base effects, in the Chinese market, MacBook Air and Mac Mini remain the best-selling models in their categories.

In addition to the strong recovery in Greater China, emerging markets have also become new growth engines for Apple. Last quarter, Apple recorded double-digit revenue growth in India, reaching a new high. Cook said that as the world’s second-largest smartphone market, Apple’s market share in India remains low, but he is optimistic about the market’s future prospects.

Meanwhile, Apple’s services business, including the App Store, iCloud, Apple Music, and payment services, performed steadily. Last quarter, revenue surpassed $30 billion for the first time, reaching $30.013 billion, a 14% increase year-over-year, with services accounting for 20.88% of total revenue. Due to the high gross margin of services at 76.5%, far exceeding hardware, it has become an important profit pillar for Apple.

The financial report shows that Apple’s overall gross margin last quarter reached 48.2%, at the upper end of guidance, a 100 basis point increase quarter-over-quarter. Among them, product hardware gross margin increased significantly by 450 basis points to 40.7%. This was mainly due to the increased proportion of high-end models like the iPhone 17 Pro series and the scale effects from higher sales, offsetting the negative impact of rising component costs.

Investor Concerns Over Rising Costs

Despite strong financial performance, Apple remains cautious in its guidance for the next quarter. Supply chain constraints combined with rising storage chip prices have become the core risks the market is paying attention to.

Cook admitted that due to demand far exceeding internal expectations, channel inventories are at very low levels. The company is currently in a replenishment phase.

The bottleneck mainly lies in the capacity of advanced process chips. The A-series chips used in the iPhone 17 series and the M-series chips used in Mac and iPad rely on TSMC’s 3-nanometer advanced process technology. Cook revealed that supply chain flexibility is limited in the short term, especially the insufficient capacity of advanced process chips, which will directly restrict product supply in the second fiscal quarter.

“Currently, we are indeed facing supply constraints, and it is difficult to predict when supply and demand will balance again,” Cook said. “The main issues we face now stem from limited capacity for our self-developed chips at advanced process nodes; at the same time, the significant increase in demand mentioned earlier has also lowered supply chain flexibility below normal levels.”

In addition to capacity constraints, rising costs are also a concern. The continuous increase in storage chip (DRAM and NAND Flash) prices has begun to squeeze Apple’s profit margins. Apple CFO Kevan Parekh stated during the call that while the impact of storage price increases on gross margin in the first quarter was minimal, it is expected to have a greater impact on gross margin in the second quarter.

To address future cost pressures, Apple management said they will evaluate a series of long-term countermeasures. Although Cook did not disclose specific details, this usually means Apple will leverage its bargaining power in the supply chain to lock in long-term orders or adjust product pricing strategies to pass on costs. However, the management did not give a clear response to whether prices will be raised to maintain profit margins.

On January 28th, Tianfeng International Securities analyst Guo Minghao stated in a research report that he expects Apple to absorb the impact of rising costs internally. Guo predicted that Apple will not raise prices for the iPhone 18 series next year but will instead endure a decline in gross margin.

Guo also mentioned that rising memory prices will affect iPhone gross margins, but Apple’s strategy is to take advantage of the memory market chaos by locking in supply and absorbing costs to increase market share, then recover through services later.

In terms of capital expenditure, Apple continues to maintain its own pace. Facing the global AI arms race, Apple has not aggressively increased capital spending on data centers like other tech giants but has adopted a “hybrid model.” Parekh explained that Apple’s capital expenditure includes various items such as equipment molds, facilities, retail investments, and data centers. Currently, Apple combines its own capacity with third-party capacity for data centers, which makes its capital expenditure more stable.

Earlier this month, Apple announced a multi-year strategic partnership with Google, stating that it will collaborate with Google to advance the next-generation foundational models and plans to incorporate Gemini capabilities into a more personalized Siri upgrade. During the earnings call, Cook mentioned that Apple will continue to independently develop some foundational models, especially for on-device AI and private cloud computing, to ensure user privacy and data security.

For Q2 FY2026, Apple provided a revenue growth forecast of 13% to 16% year-over-year. Although this growth rate is slower than in Q1, Parekh also expects gross margin to remain high at 48% to 49%, with services revenue continuing to grow at a double-digit rate.

Due to investor concerns over rising costs, Apple’s stock price remained flat after hours. After the US market closed on January 29th, Apple fell 0.6%, closing at $256.44 per share.