Apple's Inventory Jumps 154% as Memory Costs Bite Into Margins

Apple's inventory swelled 154.3% year over year to $14.54 billion in its fiscal fourth quarter, as the company raced to stockpile computer memory ahead of rising chip prices. The figure, reported Monday, compares with $5.72 billion in the year-ago quarter and $11.09 billion in the preceding quarter alone — a sequential jump of 31.1%.

The stockpiling comes at a direct cost to profitability. Apple guided to a gross margin of 45% to 46% for the December quarter, down from the 47.9% it reported for the September quarter, and it attributed the compression largely to higher memory costs.

What did Apple say about memory pricing?

CEO John Ternus did not mince words on the analyst call. "What we're seeing with memory pricing right now is unprecedented," he said.

He explained the mechanics of the current quarter in plain terms. Higher memory costs versus the June quarter were "partly offset by the benefit of carrying inventory and lower costs on certain non-memory components," Ternus said. In other words, the chips Apple bought earlier at lower prices are cushioning the blow — for now.

That cushion will thin. Apple expects "even higher memory costs" in the December quarter, and Ternus said memory prices will keep "continuing to increase" beyond December. He also acknowledged that "we'll see a decreasing benefit from the carry-in inventory on memory over time," meaning the cheaper stock is finite and will gradually run down.

The takeaway: Apple bought memory early to blunt price increases, but the protection is temporary and the underlying cost pressure is still building.

How much is Apple committing to secure supply?

To improve supply, Apple has locked in a far larger volume of future component purchases. Its manufacturing purchase obligations increased by $33 billion between June and the September quarter, according to Ternus, a figure that will appear in the company's annual filing released Tuesday.

The scale of that increase signals how aggressively Apple is bidding for memory allocation. It is a bet that paying now beats paying later, if prices keep climbing as management expects.

Apple also brought COO Sabih Khan, who oversees the company's supply chain and manufacturing, onto the call to field memory questions. Khan reiterated the higher purchase obligations and pointedly declined to rule out future price increases on Apple devices.

That refusal matters. Apple has already raised prices this year — on Mac and iPad at the end of June, and on iPhones in September — and those increases will only "partially offset" the December-quarter memory costs, per Ternus. If memory prices keep rising into next year, further price action on hardware remains on the table.

Where did the squeeze already show up?

The iPad absorbed the first visible hit. Apple blamed supply constraints for weak iPad sales in the quarter, making the tablet one of the only product segments that did not grow, even as iPhone and Mac sales beat analyst estimates.

• iPad revenue: $6.2 billion, below the $6.7 billion analysts expected.
• The figure was down 10% from the prior year.

That shortfall illustrates the commercial mechanism at work. When component supply tightens, the products lower in the pecking order feel it first, while flagship lines keep their allocation.

What happens next?

The December quarter will test how much of the memory cost Apple can pass on to customers versus absorb itself. With gross margin guidance already down roughly two to three points, the carry-in inventory benefit fading, and management openly declining to exclude further device price increases, memory pricing has become a first-order variable in Apple's earnings outlook.