Apple's Favorite Bullying Tactic Just Died in China. It Could Cost You Hundreds on Your Next iPhone.

For years, Apple’s (AAPL) most effective negotiating weapon against memory companies was to dual-source using a cheaper supplier. This playbook worked, at times to the detriment of the memory makers, who just didn’t have any alternative to the type of volume Apple offered. The emergence of artificial intelligence (AI) and the subsequent rise in memory demand has now given leverage back to companies like Micron (MU), however, while Micron itself hasn’t shied away from criticizing Apple's past behavior.

Apple recently raised the prices of some of its products, citing higher memory costs. This resulted in online discussions related to Apple’s bullying attitude in the past, with some calling it natural justice. Apple management has been lobbying hard for favorable prices and even going to the U.S. government for permission to import cheaper memory from China. Micron has similarly lobbied for a ban on Chinese chips. While the company hasn’t succeeded in getting a ban instated, it has still won in a way that many probably weren’t expecting.

Apple’s China Card Just Got Canceled

Recent reports suggest that Chinese memory maker ChangXin Memory Technologies (CXMT) has rejected Apple's proposals for a price reduction. Instead, CXMT quoted a price that is either similar to or even higher than that quoted by South Korean memory makers SK Hynix (SKHY) and Samsung. This now means that Apple does not need U.S. government approval, as the math behind buying memory from China doesn’t check out anymore. For Micron, this is a win without requiring any extensive lobbying. While it does represent a short-term dent to the wallets of consumers and Apple fans, it is also a definite win for U.S. chip manufacturing, of which Micron is a big part.

The development also changes the margin math for all companies involved. The reason CXMT has been able to negotiate from a position of strength is that domestic Chinese companies like Huawei and Xiaomi (XIACY) have already taken up most of its capacity at high prices through long-term contracts. This means that for companies like Apple, the cheaper Chinese alternative card does not exist anymore — a structural shift that will have both short- and long-term consequences. In the near term, this hands SK Hynix and Samsung leverage over U.S. companies, helping them enjoy superior pricing power and maintain strong margins.

For Apple, this comes as a big loss, and the company cannot reduce its costs through the sheer size of its orders anymore. CEO Tim Cook specializes in negotiations like these, but he is signing off in September. With new CEO John Ternus focusing on hardware innovation, Apple has a lot to look forward to. However, if memory prices stay elevated, future returns will have to come through product innovation and not just an improved supply chain.

About Apple Stock 

Apple designs and sells technology products and services around the world, with its main products including iPhone, Mac, iPad, Apple Watch, AirPods, and Apple TV. The company also generates revenue from services such as iCloud, AppleCare, streaming subscriptions, app sales, and licensing. Apple was founded in 1976 and is headquartered in Cupertino, California. 

AAPL stock has increased 15% year-to-date (YTD), outperforming the S&P 500’s ($SPX) 13% gain during the same period. Strong second-quarter results helped the stock surge earlier this year, with revenue rising 17% year-over-year (YOY). Stronger iPhone demand and record Services revenue also contributed to the rally. AAPL stock has been fairly volatile of late, climbing from roughly $275 in late June to around $340 by July 28 before falling again following Q3 earnings. Services revenue and China sales both fell short of analyst expectations. 

Apple Delivers a Record Quarter

Apple reported Q3 earnings on July 30, showing $109.4 billion in revenue, up 16% YOY and representing a June quarter record. Customer demand remained strong for the latest iPhone lineup, helping iPhone revenue increase 22% YOY. The company’s computer lineup, Mac, also delivered its best June quarter yet with $10.4 billion in revenue, growing an impressive 29% from a year ago despite significant supply constraints. CFO Kevan Parekh noted that the company’s operating expenses came in at $19.1 billion, up 23% YOY, “driven by investments in R&D.”

Looking forward, Apple expects September quarter revenue to grow between 9% and 11% YOY. For Services, management expects the growth rate to be largely similar to what the company reported in the June quarter. On the Q3 earnings call, Morgan Stanley analyst Erik Woodring asked about Apple’s pricing strategy and slower growth in its Services business. CEO Tim Cook said that Apple increased prices because memory costs rose sharply, while Parekh added that the Services business faced some pressure from weaker mobile gaming activity and changes to the App Store in some countries.

What Do Analysts Expect for Apple Stock?

Analysts remain divided on Apple following the earnings report. On Aug. 5, UBS analyst David Vogt reiterated a “Hold” rating on AAPL stock with a price target of $296. In addition, China Renaissance downgraded Apple stock to a “Hold” and set a price target of $280. In contrast, Evercore ISI analyst Amit Daryanani has a “Buy” rating on the stock with a price target of $365, reflecting 17% potential upside from current levels.

Based on 42 Wall Street analysts with coverage, Apple holds a consensus “Moderate Buy” rating. The current stock price sits relatively close to the median target of $323.19, while the lowest price target of $235 suggests potential downside of 25% from here. The high target of $400 reflects potential upside of 28% from the current share price. Still, that optimism doesn’t fully match Apple’s recent results, as Services and China sales both came in soft in Q3 and AAPL stock has fallen since the report.