Apple is throwing in the towel. A massive and continuing global shortage of memory and storage chips is driving up the prices of the company’s popular devices. “While we have done our best to mitigate the huge price increases that are being imposed on our company and have tried to protect our customers from them, the situation has become unsustainable,” outgoing Apple CEO Tim Cook said in an interview with the Wall Street Journal. Mr. Cook did not say which products would be affected, nor would he specify the size or timing of the price increases. The next iPhone Pro model could cost $270 more, according to estimates from research firm TechInsights cited in the WSJ report. The magazine said that iPhone price hikes likely won’t happen until a fall launch event, but speculated that Mac and iPad prices could happen sooner (some models have already seen price hikes). Analyst notes from Evercore ISI and Bank of America estimate that iPhone price increases will be more modest, closer to $100. Memory and storage prices have been trending upward for a while now, and Apple has really felt the pinch in recent quarters. During the company’s most recent earnings call in April, Cook said he expected “memory costs to rise significantly” in the June quarter. “We believe the impact of memory costs on our business will further increase starting in the June quarter and we will continue to assess this.” Here’s what’s happening: The ability to produce memory and storage is being eaten up by hyperscalers, and data center-grade chips are needed to continue delivering ever-increasing compute to power artificial intelligence workloads. This means there is a lack of capacity to manufacture the types of memory and storage chips needed for consumer electronics such as smartphones and computers. This results in insufficient memory and storage on both sides of the equation, leading to higher prices. “I talked to Tim Cook last night. He’s very upset. You can buy people out for a price. He certainly doesn’t want to do that, but he told me that[Apple]has used up all the DRAM we have, and that in the past you could really negotiate for DRAM, and now the hyperscalers are just taking it,” Jim said during Thursday’s morning assembly for club members. “Be aware that Apple could be a winner, but consumers could be losers.” Apple shares edged higher on Thursday. They’ve come out of the boil in recent weeks, but at just under $300 each, they’re not far from their June 2nd all-time high close of $315. AAPL YTD Mountain Apple YTD The news of price hikes from Apple isn’t all that surprising. Companies can deal with rising input costs in one of two ways. Either you can absorb the costs and accept tight margins, or you can pass on the costs and accept whatever demand destruction comes your way. Fortunately for Apple, the combination of best-in-class products and services, a tightly managed ecosystem, and a loyal customer base that tends to skew toward the high end means demand disruption is likely to be minimal. The muted reaction to the WSJ news suggests that Wall Street values this aspect of margin protection, and thus the potential for profit growth, above any concerns about demand. Demand has also proven resilient thanks to the fact that buyers rarely pay full price for an iPhone, as mobile service providers typically subsidize a large portion of the cost. But like Apple, can carriers absorb all the price increases? They also have margins to protect. Apple may also consider raising prices only on high-end models, where discretionary consumers are likely to be less price sensitive. That could allow Apple to keep the price of entry-level models the same and maintain the cost of entering the ecosystem. That would allow Apple to sell high-margin services at more affordable prices. It’s notable that this news comes now, about 10 days after Apple reassured investors that it was ramping up its AI. It’s not like Apple suddenly woke up and said, “Wow, memory prices are getting really high.” It was on June 8th that Apple announced the AI-enhanced Siri at its annual developer conference. In partnership with Google’s Gemini, conversational Siri makes Apple devices more intuitive and efficient to use. This is also one way to justify high prices to consumers. Conclusion While the idea of a price increase isn’t fun for already strapped consumers, we like this move because it protects margins from an Apple shareholder perspective. Between Apple’s popular devices, its stable ecosystem, a more affluent consumer base, and the coming era of Apple Intelligence with supercharged Siri, we believe demand will be largely unaffected by price increases. (Jim Cramer’s charitable trust is long AAPL, GOOGL. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
