The biggest highlight of Apple's financial report: Can the gross margin hold up under the impact of tariffs?

Under the pressure of soaring tariff costs, can Apple's Q3 gross margin hold the line?

After the market closes on July 30 local time, Apple will release its Q3 financial report for the fiscal year 2025 (June quarter). Data shows that Apple's Q3 gross margin guidance is 45.5-46.5% (median 46%), a significant decline from the 47.1% gross margin in the previous quarter.

However, Bank of America warns that the real pressure will actually be in Q4 (September quarter), when the company will face an additional $1 billion negative impact from tariffs, potentially causing the overall gross margin to drop to a low of 45%. The pressure on gross margin will directly impact Apple's profitability, and whether the new product cycle can bring enough ASP (average selling price) increase to offset cost pressures will be a key factor in determining the stock price direction.

Gross Margin Faces Historic Test

Bank of America stated that if prices are not raised, tariffs effectively act as a tax on Apple's product costs. Apple has been trying to alleviate this issue by shifting production and even stockpiling in advance to complete before the tariff deadline. However, these measures are difficult to fully absorb the costs.

Apple's guidance for Q3 gross margin is 45.5-46.5% (Bank of America expects 46.1%), a significant decline from the previous quarter's 47.1% gross margin. This includes $900 million in tariff-related costs.

A more severe challenge will arise in Q4 (September quarter). Bank of America expects Apple to face an additional $1 billion negative impact on gross margin, primarily due to a 20% tariff on imported iPhones, iPads, and Macs. This will lead to a 50 basis point decline in product gross margin, with the overall gross margin dropping to 45%, further declining by 110 basis points from Q3.

Bank of America believes that Q4 will be the low point for gross margin, after which improvements will rely on a better mix of higher ASP products, including the anticipated ultra-thin iPhone ("Air") to be released in the fall.

For Q3 performance, Bank of America expects Apple's quarterly revenue to reach $90.234 billion, slightly above Wall Street's expectation of $89.333 billion. The expected earnings per share is $1.45, slightly higher than Wall Street's $1.43. The outlook for Q4 is more optimistic, with Bank of America expecting Apple's quarterly revenue to reach $99.543 billion, higher than Wall Street's $98 billion. The expected earnings per share is $1.66, slightly lower than Wall Street's $1.67.

Product Cycle to the Rescue: Ultra-thin iPhone Becomes Key Variable

In the face of gross margin pressure, Apple is pinning its hopes on ASP increases brought by the new product cycle. Bank of America expects Apple to launch an ultra-thin iPhone (iPhone "Air") in the fall of 2025, with a thickness of only 6 millimeters and a 6.6-inch display.

This new model will replace last year's Plus model, priced $100 higher than the Plus model. Bank of America has increased the proportion of ultra-thin iPhones, leading to an upward revision of iPhone revenue expectations. Specifically, Bank of America has raised its iPhone revenue forecast for fiscal year 2025 from $203.607 billion to $204.507 billion, and for fiscal year 2026 from $214.837 billion to $219.987 billion.

Bank of America has also raised its Mac revenue expectations, benefiting from the new MacBook Air equipped with the M4 chip released in March. The Mac revenue forecast for fiscal year 2025 has been raised from $32.243 billion to $33.092 billion.

Services Business: Stable Growth but Facing Regulatory Challenges

Bank of America expects Apple's services business to continue to maintain low double-digit growth, with year-on-year growth expectations of 12% for both Q3 and Q4 fiscal quarters. Among them, licensing revenue, iCloud, and the App Store remain the main growth drivers.

However, the services business also faces regulatory challenges. The over $20 billion annual payment from Google to Apple for search default fees is under threat from an antitrust investigation by the U.S. Department of Justice. The EU's Digital Markets Act also forces Apple to open the App Store, which could weaken the "app tax" revenue by 30%.

Nevertheless, Bank of America believes that in the worst-case scenario, the regulatory impact will take years to manifest, giving Apple ample time to adjust and respond.

Currency Exchange Benefit: Weak Dollar Brings Tailwind

In addition to cost pressures, currency fluctuations have brought rare benefits to Apple. This is mainly due to the weakening of the dollar against major currencies such as the euro, pound, and yen, which is favorable for the dollar conversion value of Apple's overseas revenue.

Bank of America's analysis shows that currency factors will contribute to revenue boosts of 1.31% and 1.38% for Q3 and Q4 fiscal quarters, respectively, equivalent to $1.183 billion and $1.374 billion.

Bank of America maintains its target price for Apple at $235, based on a 29 times expected earnings per share of $8.20 for fiscal year 2026. This multiple is at the high end of the historical range of 19-31 times over the past five years (median 27 times).

Bank of America believes the reasonableness of the higher valuation multiple lies in the multi-year upgrade cycle, substantial cash reserves, opportunities to enter new terminal markets, and the increasingly diversified service business portfolio