Apple and Amazon reported starkly contrasting earnings— which one are you bullish on?

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Can Apple still live off its legacy strengths into next quarter?

While the world is in constant turmoil and AI advances at breakneck speed, Apple’s 'legacy advantages' remain robust and lucrative.

In the early hours of July 31 Beijing time, Apple reported its fiscal third-quarter results for 2026, ended June 27. The company posted revenue of $109.417 billion, up 16% year-over-year, and earnings per share of $2.02, a 29% increase from the prior year—both exceeding Wall Street expectations.

iPhone revenue rose 22%, and Mac sales jumped 29%. Greater China continued its prior rebound, with revenue climbing 22% year-over-year to $18.816 billion, marking its third consecutive quarter of double-digit growth.

More impressively, unlike several peers that have been pouring tens of billions of dollars each quarter into expanding AI data centers, Apple spent just $2.455 billion on property, plant, and equipment this quarter, according to its cash flow statement, generating approximately $31.914 billion in free cash flow.

However, Apple’s decision to avoid large-scale AI infrastructure expansion hasn’t shielded it from the impact of rising memory prices and tight capacity in advanced semiconductor manufacturing on its hardware business. The company forecasts revenue growth of 9% to 11% for the next quarter, below market expectations.

In short, Apple won on results this time—but lost on guidance.

Apple’s stock briefly rose 0.6% after the earnings release but quickly turned lower once the earnings call began, ending the session down about 6% and at one point falling more than 8% intraday.

Notably, tech stocks broadly rallied that day: the Nasdaq gained 2.8%, Microsoft surged 15.6%, and Amazon also jumped nearly 10% following its own earnings report.

Against a backdrop of widespread gains, Apple’s decline stood out starkly: its core business remains strong, yet Wall Street is already fretting about the next quarter.

Apple's 'core advantage' goes far beyond just the iPhone.

As of the end of June, over 2.5 billion Apple devices were still in use globally, spanning iPhones, Macs, iPads, and Apple Watches. Each device sold brings Apple more than just a one-time hardware revenue. Users subsequently purchase iCloud storage, download paid apps, subscribe to Apple Music and Apple TV+, and upgrade to new devices a few years later.

The real core advantage lies in how Apple’s hardware, operating system, services, and user habits interlock seamlessly.

According to its latest earnings report, this ecosystem continues to run smoothly.

Apple reported Q3 fiscal year 2026 revenue of $109.417 billion, up 16% year-over-year. iPhone revenue reached $54.252 billion, up 22%; Mac revenue hit $10.352 billion, up 29%—both setting new records for the June quarter.

Growth was not limited to any single market.

All five of Apple’s geographic segments posted double-digit revenue growth. Greater China revenue reached $18.816 billion, up 22% year-over-year. The iPhone achieved double-digit growth in most markets globally, with replacement buyers hitting a record high for the June quarter. Both new and upgrading Mac customers also reached all-time highs.

In other words, Apple currently relies not only on brand premium pricing but also on a large base of loyal users who remain willing to upgrade their devices.

Apple’s services revenue this quarter reached $30.739 billion, up 12% year-over-year. Cloud and payment services hit record highs, while the App Store, advertising, AppleCare, music, and video services all reached their highest levels ever for the same period. Apple now has over 1.5 billion paid subscriptions, with both paying accounts and transacting accounts reaching record highs.

While services account for only about 28% of Apple’s total revenue, they contribute roughly 42% of its gross profit. The segment’s gross margin stands at 75.6%, significantly higher than the 40.1% margin from hardware sales.

Cash flow also looks very strong.

This week, major U.S. tech giants released their earnings reports one after another, revealing a clear trend: AI infrastructure investments have significantly squeezed these giants’ cash flows. Meta’s free cash flow for the quarter dropped to just $784 million, a 91% year-over-year decline; Microsoft’s fell from $25.6 billion to $19.6 billion; and Amazon’s cash flow over the past 12 months swung from an inflow of $18.2 billion to an outflow of $7.6 billion.

With spending at this level, it’s hard for Wall Street not to worry. Against this backdrop, Apple’s cash flow feels like a breath of fresh air.

Apple generated $34.369 billion in operating cash flow this quarter. Based on its consolidated statement of cash flows, capital expenditures for the quarter totaled just $2.455 billion, resulting in free cash flow of $31.914 billion. The company also repurchased approximately $25.8 billion of its stock and paid about $4 billion in dividends, while still holding $147 billion in cash and marketable securities.

Apple has not followed its peers in heavily upgrading data centers.

According to each company’s reported figures, Meta’s capital expenditures this quarter reached $31.078 billion, Microsoft’s hit $41 billion, Amazon’s climbed to $53 billion, while Apple’s stood at only $2.455 billion—less than one-tenth of Meta’s.

However, Apple is also ramping up its AI investments. R&D expenses this quarter reached $11.729 billion, up 32% year-over-year. Operating expenses increased by 23%, primarily due to higher R&D spending.

During the earnings call, Wamsi Mohan, an analyst at Bank of America Securities, asked whether Siri AI would increase Apple’s capital intensity.

Cook responded that Apple uses a hybrid model combining self-built data centers and third-party cloud services. AI-related spending is rising significantly and will appear not only in operating expenses but also in product and service costs. However, he added that it’s still too early to determine exactly how much computing power Siri AI will ultimately require or how much it will add to costs.

In another Q&A session, Cook also stated that running certain requests directly on devices holds strategic importance for Apple and serves as a 'competitive weapon.'

This solution relies heavily on Apple's own chips.

New iPhones and Macs can already run certain AI tasks directly on-device. Tasks like photo processing, voice recognition, and content summarization—if performed locally—eliminate the need to send data to the cloud every time and avoid incurring server fees for each API call.

During the earnings call, Apple cited two examples: Disney’s creative teams are using Macs to handle local AI workloads to reduce cloud token expenses, while Crédit Agricole in France uses MacBook Pros for regulatory compliance tasks, cutting manual processing time by over 80%.

For Microsoft, Meta, and Amazon, every additional AI request from users potentially increases computational pressure on their data centers. Apple, however, can offload part of the workload to chips already in users’ hands before sending more complex tasks to the cloud.

Siri AI could also generate new revenue for Apple’s services segment.

Goldman Sachs analyst Michael Ng asked Cook how Apple plans to recoup the computing costs of Siri AI. Cook acknowledged that the company doesn’t yet have a complete plan but expects a cohort of users will use AI heavily, so Apple may allow them to upgrade to higher-tier iCloud+ subscriptions to purchase additional usage quotas.

This is particularly interesting—it means Siri AI already has at least one straightforward monetization path: if users want to use it more, they simply upgrade to a higher-tier iCloud+ plan. Apple doesn’t even need to build a new billing system; it can leverage its existing subscription infrastructure.

However, building fewer data centers doesn’t mean Apple can entirely avoid the costs of the AI arms race. Strong demand for memory in AI data centers has already driven up Apple’s costs, and advanced semiconductor manufacturing capacity is tightening due to stronger-than-expected demand for iPhones and Macs.

This issue may become evident in the coming quarter—and it was likely Apple’s comments on this very point that triggered the stock’s decline following the start of the earnings call.

Right after the earnings release, Apple’s stock briefly rose about 0.6% in after-hours trading. However, once CFO Kevan Parekh provided guidance for the next quarter, the stock quickly reversed course, ending the call down roughly 6% and at one point falling more than 8% during the session.

Apple expects revenue for the next quarter to grow 9% to 11% year-over-year, below Wall Street’s expectation of approximately 12%. iPhone revenue is projected to rise by about 15%, also lagging behind the market’s forecast of 17.6%.

Parekh cited two reasons: foreign exchange rates will drag growth by roughly 2.5 percentage points, and supply constraints will significantly worsen, affecting iPhone, Mac, and iPad.

Cook stated that supply shortages have already emerged this quarter, with Macs being the hardest hit, while iPhone and iPad have also faced some constraints. The situation is expected to deteriorate further next quarter. Apple’s primary challenge lies in insufficient capacity for advanced semiconductor processes, as demand for both iPhone and Mac has exceeded the company’s earlier estimates, leaving little room for supply chain adjustments.

Memory is an even bigger headache.

Apple paid higher memory prices in the March quarter than in December of the prior year, and prices rose significantly again in June compared to March. They are set to climb further in the September quarter. Previously purchased inventory has provided some cost buffer, but this cushion will gradually erode.

Morgan Stanley analyst Erik Woodring pressed Apple on its recent pricing strategy and whether the company aims to protect product gross profit or gross margin. Cook described the current memory market conditions as a 'once-in-a-century flood,' noting that memory prices are rising exponentially, forcing Apple to reluctantly raise prices on select products.

It remains unclear whether price increases will fully offset rising costs. Cook noted that channels need time to absorb the revised pricing, and consumer reactions to the new prices will require several more weeks of observation.

The pressure has already been reflected in Apple’s gross margin guidance.

Apple’s gross margin this quarter reached 50.1%, including approximately 2 percentage points from tariff refunds; excluding that, it was around 48.1%. For the next quarter, gross margin is expected to be between 47% and 48%, which still includes about 1 percentage point from tariff refunds. Stripping that out, the underlying gross margin midpoint would be roughly 46.5%.

In other words, Apple’s underlying gross margin could decline by approximately 1.6 percentage points within a single quarter. Parekh explicitly stated that nearly all of this decline can be attributed to rising memory costs.

Meanwhile, the services business hasn’t grown fast enough to alleviate pressure on hardware.

Apple’s services revenue grew by 12% this quarter, down from 16% in the previous quarter. The company expects foreign exchange rates to weigh down services growth by approximately 2.5 percentage points next quarter. Softness in mobile gaming, adjustments to the App Store’s business model, and a U.S. court ruling allowing developers to steer users toward external payment methods are also affecting this highest-margin segment.

Siri AI isn’t filling this gap for now. Apple hasn’t disclosed user numbers, cost per query, or pricing. In China, only select early Apple Intelligence features have been approved so far; the full Siri AI still requires more work. In the European Union, the iPhone and iPad versions remain subject to regulatory restrictions.

Apple is still comfortably living off its legacy strengths, generating $31.914 billion in free cash flow this quarter while peers burn cash aggressively. But that can only buy Apple time. $Apple (AAPL.US)$$Virtual Reality (LIST2139.US)$$Duan Yongping chicang gainian (LIST2116.US)$$Apple Ecosystem (LIST2437.US)$$Star Tech Companies (LIST2518.US)$$Streaming Services (LIST2432.US)$$Wireless Charging (LIST2577.US)$$Apple Concept (LIST0560.SH)$$AI (LIST0535.SH)$$Artificial Intelligence (LIST2136.US)$$Artificial Intelligence (LIST23586.HK)$$AI phone (LIST23147.SH)$

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