Apple 3Q FY26 Earnings Update: The Margin Bill Has Arrived

On 30 July, Tim Cook held his final earnings call as Apple’s CEO before handing over the role to John Ternus. Overall, Apple delivered a strong June quarter, beating both top- and bottom-line consensus estimates. Revenue grew 16.4% y/y to USD109.4 billion, while EPS rose 29% to USD2.02 (vs. consensus of USD1.89). While part of the earnings beat came from tariff refunds, which contributed around USD0.11 to EPS and 2% to gross margin, adjusted EPS was still slightly ahead of expectations at approximately USD1.91.

Nevertheless, the stronger headline results were overshadowed by weaker upcoming 4Q FY26 guidance. Rising memory costs are now flowing through Apple’s margins, while advanced-node chip constraints are limiting its ability to fully capture the current demand across iPhone and Mac. As such, the post earnings selloff was driven less by the June-quarter performance and more by concerns over how much of the current hardware momentum can be sustained over the coming quarters.

Figure 1: Apple’s share price.

Hardware carried the quarter while Services lost some shine

iPhone remained the main driver, with revenue growing 21.7% y/y to USD54.3 billion, ahead of expectations of USD53.9 billion and marking Apple’s strongest June quarter for the category. Mac revenue also rose 28.7% to USD10.4 billion, materially above expectations of USD8.7 billion, supported by demand across both the more affordable MacBook Neo and the premium MacBook Pro.

The product outperformance reinforces our view that Apple’s hardware growth can continue to be supported by premium mix, higher storage configurations and wider ecosystem entry points, even within a mature device market.

However, Services was less impressive. Revenue grew 12.1% y/y to USD30.7 billion, slowing from 16.3% growth in 3Q FY25 and missing market expectations. Foreign exchange losses were the main driver of the underperformance, while part of the weakness was driven by softer mobile-gaming activity and changes to the App Store business model in several markets, including the impact of allowing external payment links in the US.

That said, strong double-digit growth in categories such as cloud services, video, payment services, and advertising remained robust. Moving forward, while management guided another 2.5 point sequential headwind to Services growth from foreign exchange, we remain constructive on the Services business, supported by Apple’s continued growth in its installed base (management cited an installed base of over 2.5 billion active devices, which has reached another all-time high across all major product categories and geographic segments) and expanding ecosystem monetisation.

Figure 2: 3Q FY26 earnings summary.

Source: Company, Claude, iFAST compilations. Data as of 30 July 2026.

The margin pressure has arrived

Excluding the impact of tariff refunds, Apple reported an underlying gross margin of approximately 48.1%, down from 49.3% in the March quarter. Looking ahead, management guided for a gross margin of 47%–48% in the coming quarter, with the range including another 1% benefit from tariff refunds, suggesting that the underlying margin outlook is weaker than the headline guidance implies.

Overall, the margin pressure was in line with our expectations, as rising memory costs and fading inventory management benefits have started to weigh on product margins, as highlighted in our previous write-ups.

Meanwhile, although Apple has responded to the rising costs by raising prices across several products, we note that these increases were only implemented on 25 June, meaning the current quarter’s results did not yet capture their full impact on consumer demand. On top of that, although Apple is reportedly testing alternative memory chip suppliers such as China’s CXMT, we believe adoption outside China will remain selective due to regulatory and political sensitivities.

Hence, we remain cautious and expect product margins to be weighed further by rising costs in the coming quarters.

Figure 3: Apple’s gross margin.

Greater China growth is moderating

In 3Q FY26, all geographic segments achieved record quarterly revenue, with most emerging markets recording double-digit growth. Notably, while Greater China revenue remained resilient, rising 22.4% y/y to USD18.8 billion, it came in below expectations of USD19.7 billion.

On top of that, growth has moderated from the earlier quarters, which is broadly in line with our view that Apple’s China rebound would gradually normalise as the benefits from the iPhone 17 cycle. Meanwhile, domestic smartphone competition also remains intense, particularly within the premium segment, while concerns over Apple’s ability to maintain its current pricing strategy under China’s subsidy programme remain.

Figure 4: Greater China’s revenue growth y/y.

Capital discipline remains intact

In terms of capital allocation, while Apple has increased AI and component spending, the company’s capital allocation discipline remains intact, where Apple increased its share buybacks to USD25.1 billion from USD21.1 billion in 3Q FY25.

Meanwhile, unlike the hyperscalers, Apple hasn’t adopted a similarly aggressive increase in capital expenditure to develop its AI roadmap, instead, its reliance on on-device processing, custom silicon, and external cloud partners allows the company to maintain a comparatively asset-light financial profile while continuing to return capital to shareholders. Hence, we believe this capital discipline remains one of the key supports for the company’s premium valuation.

Apple Intelligence visibility is improving, but execution remains the key test

Encouragingly, we are glad to hear that management provided a more positive tone around the Apple Intelligence rollout, while recent progress toward securing regulatory approval in China further boosted our confidence in the rollout of Apple Intelligence within the region, which could help increase competitiveness and drive replacement demand.

That said, the September product launch and iOS 27 rollout remain the key execution risks, as Apple’s ability to deliver integrated, personalised and privacy-focused AI experiences will be critical to driving upgrades and supporting incremental Services monetisation.

Reiterating HOLD on Apple

Overall, the quarter strengthens our confidence in Apple’s premium hardware positioning, but also validates our concerns around margin and valuation. Hardware demand remains healthy, supported by iPhone and Mac, while Apple’s ecosystem continues to sustain premium pricing and higher value product mix.

Several near-term earnings headwinds remain, such as memory costs are now pressuring margins, and advanced-node chip constraints are limiting near-term revenue conversion. On top of that, the recent product price increases have yet to be fully tested against consumer demand.

As such, while we believe Apple remains a high-quality consumer technology company, the company’s current valuation of around 35x forward P/E, (as of 30 July), has been largely supported by its capital allocation discipline, consistent shareholder returns and improving visibility around Apple Intelligence.

With much of the potential upside from these catalysts already priced in, we reiterate our HOLD call on Apple, with a target price of USD 311 in FY28E.

Table 1: Valuation Summary

In Millions of USD	FY 2025	FY 2026 E	FY 2027 E	FY 2028 E
Revenue	416,161.0	465,428.3	509,084.9	544,865.1
Growth %, YoY	6.40%	11.84%	9.38%	7.03%
EPS	7.46	8.76	9.65	10.73
Growth %, YoY	10.60%	17.43%	10.16%	11.19%
P/E	24.27	35.62	32.33	29.08
Fair P/E				29
Upside Potential				-0.3%
Target Price (USD)				311
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 31 July 2026.