Apple FQ1 26 – The Gimmick Dividend  

Pointless gimmicks are still a crowd pleaser

• Apple reported great results for no other reason than the new iPhone looks different from the older ones, in a sure sign that status still drives the smartphone industry, where (fortunately for Apple), AI has yet to have an impact.
• FQ1 revenues / EPS were $143.8bn / $2.84, slightly ahead of estimates of $138.4bn / $2.67 as the new iPhone drove an upgrade cycle that was slightly better than expected.
• China was also a major driver, where sales grew by 38% YoY, but there were also some headwinds.
• These limited the after-hours response of the shares despite the relatively good guidance that the iPhone 17 upgrade cycle will continue boosting revenues for at least the next quarter.
• Here, FQ3 26 revenues are expected to grow by 13% – 16% YoY, which is nicely ahead of expectations, but as always with a mature industry like this, this is temporary.
• A new product that consumers identify with causes users to upgrade their devices sooner than they would normally do so, and once that has happened, growth slows and goes negative as the replacement cycle lengthens once again before coming back to baseline.
• The other main issue is AI, where Apple’s efforts remain in disarray and have seen it being forced to do a deal with the devil (Google) (see here).
• Fortunately for Apple, AI still has no effect on the user’s decision of which smartphone to buy, which gives Apple some time to get its house in order.
• The other headwind is memory pricing, which I think for Apple is not nearly as negative as it sounds.
• This is because all of its competitors are facing the same issue, and as one of the largest buyers of memory and the most profitable vendor, Apple has options.
• Here, it can increase prices to maintain gross margins or keep pricing flat and look to pick off the top end of the Android market.
• The Android vendors already have low gross margins and, as such, will be forced to increase pricing, and they will individually have lower bargaining power with the memory vendors (except Samsung).
• The general expectation is that Apple will increase pricing with the iPhone 18, and I tend to agree based on Apple‘s long-held practice of keeping wholesale pricing margin over bill-of-materials of 70%.
• The fact that the shares have not rallied on the back of better-than-expected revenues, profits, and guidance is a sign that Apple is no longer the market darling and that its valuation is more expensive than the market wants to pay.
• Here, the shares are trading on 31.4x 2026 and 28.4x 2027, which is a lot to pay for a company facing this degree of headwind and stagnation.
• Hence, I remain uninterested in investing in the shares of the company, but its stability makes it a good target to take the other side of a pair trade where one has more conviction.