Apple warns AI-era chip shortages are limiting its growth
Strong iPhone and Mac demand pushed quarterly results above expectations, but supply constraints forced the company to lower its outlook.
Apple warned that sales growth in the current quarter ending in September will be slower than Wall Street expected, as the iPhone maker struggles to secure enough advanced components to meet demand for its latest products. Shares fell in after-hours trading following the forecast.
Apple and the broader technology industry have been scrambling to secure supplies of high-end processors and memory chips as demand rises for more advanced devices. Executives emphasized that the weaker outlook was driven by supply constraints rather than a slowdown in customer demand.
"We're seeing some very significant constraints currently, with limited flexibility in the supply chain to remedy it," CEO Tim Cook said during the earnings call. He added that Apple was "evaluating all options" for alternative suppliers of memory chips.
Chief Financial Officer Kevan Parekh told analysts that Apple expects revenue growth of 9%-11% in the September quarter compared with the same period last year, below Wall Street's forecast of 12%, according to LSEG data.
Parekh said iPhone revenue is expected to grow at a mid-teens rate, compared with analysts' forecast of 17.6%, while gross profit margins are expected to range between 47% and 48%.
In an interview with Reuters, Cook said the main supply constraint in Apple's fiscal third quarter was a shortage of advanced chipmaking capacity used to manufacture the company's custom Apple silicon chips. The issue was particularly significant for the Mac lineup, where sales jumped 29% thanks to strong demand for the entry-level MacBook Neo and high-end MacBook Pro despite price increases.
"If you look at the root causes behind those, it's that we're having an incredibly strong product cycle beyond our expectations, and the advanced chipmaking supply chain just fundamentally has less flexibility to meet the high levels of demand," Cook said.
The weaker forecast comes as expectations remain high for Apple, which recently reclaimed the title of the world's most valuable company from AI chip leader Nvidia. Apple's shares have gained more than 22% this year.
The company reported fiscal third-quarter results that exceeded Wall Street expectations, although slower-than-expected growth in services revenue raised concerns among some investors about the sustainability of Apple's momentum.
Revenue for the quarter ended June 27 rose 16.4% to $109.42 billion, compared with analysts' forecast of 15.5% growth, according to LSEG data. Customers continued buying iPhones and Macs despite higher prices across the consumer electronics market.
Apple reported quarterly earnings of $2.02 per share, including an 11-cent contribution from tariff refunds received from the U.S. government. Excluding the refunds, earnings still exceeded Wall Street expectations of $1.89 per share.
The main growth driver was the iPhone business, with revenue rising 21.7% to a record $54.25 billion for a fiscal third quarter, beating estimates of $53.86 billion. Typically, iPhone sales slow during this period as customers wait for Apple's annual September product launch.
This year, however, customers accelerated purchases amid a global memory-chip shortage that pushed Apple to increase prices for Macs and iPads. The company has so far avoided raising prices on its flagship iPhone line, although analysts increasingly expect a price increase at Apple's September launch event.
Bob O'Donnell, chief analyst at TECHnalysis Research, said investors may question whether the strong iPhone performance reflects a temporary buying surge ahead of price increases.
"I do think it's possible people are going to continue to buy the existing phones because of the price increases," he said. "The big question is what's going to happen with Macs in this quarter, when the new prices are fully reflected."
Apple's gross margin was 50.1%, including a two-percentage-point benefit from tariff refunds. Excluding that impact, margins were 48.1%, near the midpoint of Apple's guidance and above analysts' estimate of 47.92%.
Mac revenue surged 28.7% to $10.35 billion, well above expectations of $8.74 billion. iPad revenue declined 5.9% to $6.19 billion, missing estimates of $6.92 billion, with Cook attributing the decline partly to a difficult comparison with last year's launch of the lower-cost A16 iPad.
Revenue in Greater China increased 22.4% to $18.82 billion, but fell short of analysts' expectations of $19.67 billion.
Apple's services business, its second-largest revenue segment, grew 12.1% to $30.74 billion, missing estimates of $31.22 billion.
The slowdown raised concerns among investors who view services, including the App Store, subscriptions and advertising, as a key source of high-margin growth.
"Investors are concerned that if services are decelerating while iPhone is growing more than 20%, it may slow down even more as iPhone sales come back down to earth," said Gil Luria, an analyst at D.A. Davidson.
Parekh said App Store revenue from mobile gaming faced pressure from regulatory changes and legal battles. The European Union has required Apple to allow alternative app stores on iPhones, while a U.S. ruling involving Epic Games, the maker of Fortnite, allows developers to direct users to external payment systems.
"We did see some headwinds in mobile gaming," Parekh said, adding that the Epic Games ruling continues to weigh on the business.
Meanwhile, Apple is continuing to expand its artificial intelligence offerings. Earlier this year, the company introduced a revamped Siri with new AI capabilities developed with help from Alphabet's Google.
Cook said Apple may eventually offer paid upgrades for users seeking more advanced AI features, including through iCloud Plus.
"We will have some kind of upgrade possibilities on iCloud Plus, where people can buy up the stack," Cook said.
