Supply-chain legend Tim Cook finally meets his match with Apple's memory crunch

By Christine Ji

Apple has found itself dealing with component shortages exacerbated by the AI boom, and the company is scrambling for solutions

Shares of Apple were tumbling 10% in Friday trading.

In his nearly three decades at Apple, Tim Cook completely revolutionized the company's supply chain and guided the company through tariffs, pandemic shutdowns and other obstacles.

But in a stroke of irony, Cook departs from the CEO role at a time when Apple (AAPL) confronts its most daunting supply-chain bottleneck yet - with seemingly no solutions in sight.

Thursday marked the last Apple earnings call headed by Cook, who will be succeeded by John Ternus in September. While the company reported above-consensus earnings and revenue for the fiscal third quarter, weak guidance for the September quarter led Apple shares to fall 10% in Friday trading. Memory cost pressures are also showing up in Apple's margins: Excluding tariff refunds, Apple's gross margin actually declined 120 basis points quarter-over-quarter.

The impact of supply constraints is expected to "increase significantly sequentially," the company shared on the earnings call. Demand for the iPhone and Mac has outstripped forecasts, resulting in bottlenecks for the advanced chips that power these devices. And a global shortage of dynamic random-access memory thanks to the artificial-intelligence boom has forced Apple to raise prices on Macs and iPads, with potential hikes for the iPhone coming as well.

The wild success of the iPhone 17 cycle has contributed to these headwinds, William Kerwin, Morningstar senior equity analyst, told MarketWatch. Growth in the September quarter is being capped because Apple can't fulfill demand fast enough.

"I think it's going to continue into and through 2027 because global chip supply is limited with all the demand for AI," Kerwin said.

Today's logistics challenges are unlike anything Apple has experienced before. Cook's first big move when he joined the company in 1998 was to implement a "just-in-time" inventory system by slashing unsold product storage times, consolidating suppliers and outsourcing manufacturing.

Apple's playbook today is the complete opposite. Inventory on the balance sheet swelled to $11.1 billion last quarter, nearly doubling from a year before. The company is stockpiling components ahead of schedule, but expects the benefit to diminish in future quarters. "We've been pulling supply ahead," Cook said on the earnings call. "At some point, there's a limit to that."

For the 2005 launch of the iPod nano, Cook used massive upfront payments to secure a steep discount on Samsung's (KR:005930) flash memory chips, buying up 40% of the company's supply and cornering the global memory market, according to the New York Times. The AI boom has completely flipped the dynamics, with the "Big Three" suppliers of Micron (MU), SK Hynix (SKHY) and Samsung now commanding unprecedented pricing power. AI infrastructure companies, not Apple, are now the biggest buyers of memory chips, leaving Apple looking for new suppliers.

"In terms of the sources of supply, primarily the DRAM market has three suppliers," Cook said on the earnings call. "Obviously if there were more suppliers...it would help us on the supply side and perhaps the pricing side." The company is reportedly in talks to buy DRAM from the Chinese memory manufacture ChangXin Memory Technologies (CN:688825) - a move that has resulted in Apple facing bipartisan pushback in Congress.

Political controversy notwithstanding, CXMT only commands 8% of the global DRAM market. "It's not a magic wand that can make these supply issues go away," Morningstar's Kerwin said.

Kerwin believes the worst of the supply constraints will occur at the end of the iPhone 17 cycle in September and improve afterwards.

"I do think Apple has the ability to plan for higher supply when it releases the new iPhone 18 family in the fall," Kerwin said. Additionally, "there's a lot more memory chip supply coming online at the tail end of 2027 and in 2028, and that should at least provide some relief on the memory prices," Kerwin added.

However, Needham analyst Laura Martin took a less optimistic view. Apple's "economics are under pressure owing to structurally rising input costs and supply chain constraints, neither of which will improve in the near term, we believe," she wrote in a Friday note. She thinks it could take much longer for memory costs to fall.

"We worry that Apple's component costs will rise materially over the next several quarters (or years)," Martin said.

-Christine Ji

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