Apple: AI Struggles, Still Relying on iPhone to Save the Day

$Apple(AAPL.US) On the morning of August 1, 2025, Beijing time, Apple released its third-quarter financial report for fiscal year 2025 (ending June 2025) after the U.S. stock market closed. Key points are as follows:

1. Overall Performance: Driven by iPhone, performance significantly exceeded expectations. This quarter, Apple achieved revenue of $94 billion, a year-on-year increase of 9.6%, compared to the market consensus of $89.2 billion.

The company's revenue increase this quarter was mainly driven by the better-than-expected performance of the iPhone business, with both Mac and software services achieving double-digit growth. Apple's gross margin was 46.5%, an increase of 0.2 percentage points year-on-year, compared to the market consensus of 46%.

Due to the impact of low-cost phones, tariffs, and capacity adjustments, the hardware gross margin fell to 34.5% this quarter, while the software services business maintained a relatively high gross margin of 75.6%.

2. iPhone: Double-digit growth, increase in both volume and price. This quarter, the company's iPhone business achieved revenue of $44.6 billion, a year-on-year increase of 13.5%, significantly exceeding the market consensus of $39.85 billion.

The growth in the mobile phone business this quarter was mainly driven by the iPhone 16 series, demand from emerging markets (double-digit growth), and pre-purchases in response to tariffs.

For this quarter, Dolphin Research estimates that the overall iPhone shipment volume increased by 2.7% year-on-year, and the average selling price increased by 10.5% year-on-year.

3. Other Hardware Beyond iPhone: Mac is strong, while iPad and other products are sluggish.

The company's Mac business achieved a 15% year-on-year growth this quarter, mainly driven by the M4 MacBook Air, with double-digit growth in emerging market revenue, new users, and upgrade users;

However, the iPad and other hardware businesses declined this quarter, mainly due to the high base effect from the release of the iPad Air/Pro in the same period last year.

Although some products benefited from China's state subsidies, the overall impact on Apple's performance was not significant this quarter.

4. Software Services: Unafraid of challenges, reaching new highs.

Despite the challenge of the U.S. App Store allowing external links, the company's software services revenue this quarter was still $27.4 billion, compared to the market consensus of $26.8 billion.

With a high gross margin of 75.6%, the company's software business accounted for nearly 29% of revenue, generating 47% of the company's gross profit.

5. Revenue by Region: Growth across the globe. Among them:

The Americas remain the company's mainstay, accounting for 43.8% of revenue, achieving a 9.3% year-on-year growth this quarter;

Under the influence of China's state subsidies, the Greater China region achieved a 4.4% year-on-year growth this quarter, reversing the previous continuous decline;

This quarter, other Asia-Pacific regions had the fastest growth rate, reaching 20%, mainly driven by demand from markets such as India.

Dolphin Research's Overall View: Earnings supported by iPhone, AI breakthrough still requires effort

Apple delivered a fairly good performance this quarter, with the main expectation difference coming from the iPhone business.

As the company's largest foundation, the iPhone business achieved double-digit growth this quarter, influenced by demand from emerging regions and pre-purchases due to tariffs.

Based on IDC and other shipment data, Apple's mobile phone shipments increased by about 2% year-on-year this quarter, while the average iPhone price increased by about 10% year-on-year.

Regarding gross margin, while hardware revenue increased year-on-year, the hardware product gross margin showed a significant decline, mainly due to approximately $800 million in tariff-related costs.

Excluding this impact, Dolphin Research estimates the company's hardware product gross margin for this quarter to be 35.7%, an increase of 0.4 percentage points year-on-year.

As the company expects to bear approximately $1.1 billion in tariff-related costs next quarter, this will continue to pressure the hardware product gross margin.

Regarding the company's measures to address tariffs:

① Optimizing the supply chain and adjusting production distribution (currently, most iPhones sold in the U.S. are produced in India, while Macs and others are produced in Vietnam);

② Expanding domestic investment in the U.S. to gradually improve the localized supply chain. With the company's management capabilities and industry chain position, the impact of tariffs will be mitigated.

Although Apple delivered an "above expectations" performance this quarter, the company still faces multiple risks:

a) Among the factors that exceeded expectations for the iPhone this quarter, the sustainability of emerging markets is uncertain, and the demand from U.S. consumers for pre-purchases due to tariffs is unlikely to last long, not strictly a positive factor.

In terms of the mobile phone market itself, demand remains sluggish, and competition in some regions is intensifying: Based on IDC and other industry data, the global mobile phone market growth rate this quarter was only in the low single digits, and Apple's mobile phone shipment growth rate was only about 2%.

Although the company's iPhone business revenue achieved double-digit growth, the company's market share in global shipments this quarter was only 15.7%, a year-on-year decline.

b) Challenges brought by the U.S. App Store allowing external links: Apple has long earned substantial profits through commissions from the App Store, with the "Apple tax" allowing Apple to take a cut when users pay to download apps or purchase in-app digital goods and services.

With the allowance of external links, some transactions bypass Apple's payment system, preventing Apple from taking commissions on these transactions, directly leading to revenue loss;

c) Potential impact of the Google lawsuit: The U.S. Department of Justice has sued Google for abusing its search engine monopoly, including Google paying Apple to be the default general search engine (GSE) for Apple's devices (iPhone, Mac, etc.) as search access points (SAPs).

Apple receives global traffic acquisition costs (TAC) from Google amounting to $20-30 billion, with the U.S. market contributing about $12.5 billion, included in service business revenue.

The worst-case scenario is losing $12.5 billion from the U.S. market, with the current market's relatively neutral expected impact range being $4-6 billion.

These (a+b+c) risks may have a phased impact on Apple, but with a large user base and ecosystem stickiness, Apple as a hardware terminal still has a significant moat, and the impact on the company's operations is not expected to be too large.

From an investment perspective, considering Apple's current market value ($3.1 trillion), it corresponds to approximately 28 times PE for the company's fiscal year 2025 net profit (assuming company revenue +6.4%, gross margin of 46.7%, tax rate 15.6%).

Referring to the company's historical valuation range (25-35 times PE), the current valuation is in the lower-middle part of the range, indicating that the market's expectations for the company are relatively low at present.

At first glance, the company's net profit growth rate for this fiscal year will reach 26.7%, but this is due to the one-time impact of the EU back taxes (approximately $10 billion) in the previous fiscal year.

Excluding this impact, the actual profit growth rate for this quarter is about 7%. If the iPhone 17 does not have major innovations and AI implementation continues to be delayed, the company may also continue to experience single-digit growth in the next fiscal year.

Among companies with single-digit growth, Apple can enjoy nearly 30 times PE, mainly because the market values the company's position in the high-end mobile phone market, its industry chain influence, and the barriers of its software ecosystem.

Although the company has increased capital expenditures in recent quarters, with total capital expenditures reaching $9.47 billion in the first three quarters of this fiscal year, a year-on-year increase of 45%.

However, the AI innovation that the market expects has not yet seen a breakthrough, and the Siri update has been postponed to next year. If the iPhone or hardware side fails to show innovation, and the AI business continues to struggle to achieve breakthroughs, the company will find it difficult to make a "further" leap.

Overall, although Apple faces potential external risks, the company still has a large user base, and its operations will remain stable.

However, it should not be overlooked that Apple's current lack of product innovation and slow AI progress will somewhat weaken market expectations for the company.

A solid moat can provide a bottom line for Apple. However, if the company continues to fail to offer new highlights, its stock price will also find it difficult to break through the traditional valuation range.

Dolphin Research's detailed analysis of Apple's financial report is provided below:

I. Overall Performance: iPhone Drives Significant Beat in Expectations

1.1 Revenue: Apple Inc. reported revenue of $94.0 billion in Fiscal Year 2025 Q3 (i.e., 2Q25), up 9.6% year-over-year (YoY), exceeding market consensus expectations of $89.2 billion. The company's revenue growth this quarter was primarily driven by the better-than-expected performance of the iPhone business, while Mac and Services businesses both achieved double-digit growth. However, iPad and Wearables, Home, and Accessories (other hardware businesses) continued to experience year-over-year declines.

Looking at hardware and software separately:

• Apple's hardware business grew by 8.2% this quarter. Despite declines in iPad and Wearables, Home, and Accessories, the company's core hardware products (iPhone and Mac) both achieved double-digit growth, leading to overall positive growth in the hardware segment.

• Apple's Services business grew by 13.3% this quarter. The Services business demonstrates a degree of resilience. Even with challenges posed by the allowance of external links in the U.S. App Store, Services maintained double-digit growth this quarter.

From a regional perspective, revenue showed varying degrees of year-over-year growth across all regions. The Americas, Europe, and Greater China are the company's three primary revenue sources. Specifically, the Americas accounted for 43.8% of revenue, growing 9.3% this quarter; Europe grew 9.7% this quarter. Driven by China's national subsidy policy, revenue in Greater China finally rebounded this quarter, growing 4.4% year-over-year.

Among all regions, the fastest revenue growth was observed in Other Asia Pacific, up 20% year-over-year, primarily driven by demand from countries like India.

1.2 Gross Margin: Apple's gross margin for Fiscal Year 2025 Q3 (i.e., 2Q25) was 46.5%, an increase of 0.2 percentage points year-over-year, exceeding market consensus expectations of 46%. The improvement in the company's gross margin was primarily driven by higher gross margin in the Services business and structural factors.

Dolphin Research's breakdown of hardware and Services gross margins shows:

Apple's Services gross margin continued to maintain a relatively high level of 75.6% this quarter, which was the primary driver of the company's overall gross margin improvement. However, the hardware gross margin declined to 34.5%, primarily impacted by tariff-related costs, amounting to approximately $800 million this quarter. If this impact is excluded, the company's hardware gross margin for this quarter would be approximately 35.7%, representing a year-over-year increase.

As the company expects tariff-related costs to be around $1.1 billion next quarter, it is inferred that the company's hardware gross margin will remain under pressure.

1.3 Operating Income: Apple's operating income for Fiscal Year 2025 Q3 (i.e., 2Q25) was $28.2 billion, up 11.2% year-over-year. The growth in Apple's operating income this quarter was primarily driven by revenue growth.

Apple's operating expense ratio was 16.5% this quarter, a year-over-year decrease of 0.2 percentage points. The company's selling, general, and administrative (SG&A) expenses remained stable, with additional expenses this quarter primarily reflected in research and development (R&D) expenditures.

Considering the current capital expenditure situation, the company's capital expenditure for the first three quarters of this fiscal year reached $9.47 billion, a year-over-year increase of 45%. The increase in R&D and capital expenditures also indicates the company's increased investment in innovative businesses such as AI. However, these investments are still relatively low compared to the company's overall performance.

II. iPhone: Growth in Both Volume and Average Selling Price

iPhone business revenue for Fiscal Year 2025 Q3 (i.e., 2Q25) was $44.6 billion, up 13.5% year-over-year, exceeding market consensus expectations of $39.8 billion. The growth of the company's iPhone business this quarter was primarily attributed to the iPhone 16 series, double-digit growth in emerging market demand, and a pull-forward of purchases in anticipation of tariffs.

Dolphin Research specifically examines the relationship between volume and price to identify the main drivers of iPhone business growth this quarter:

1. iPhone Shipments: According to IDC data, the global smartphone market grew by low single-digits year-over-year in Q2 2025. Apple's global shipments grew by approximately 2.7% year-over-year this quarter, with its shipment performance being similar to the overall market.

This quarter's growth primarily stemmed from: 1) The company's previous release of the iPhone 16e, with new product launches driving some demand increase; 2) The expectation of price increases due to uncertainty in U.S. tariff policies, prompting some consumers to make early purchases; 3) Double-digit growth in iPhone sales in emerging markets like India.

2. iPhone Average Selling Price (ASP): Calculated based on iPhone business revenue and shipments, the iPhone ASP this quarter was approximately $961, a year-over-year increase of 10.5%, driven by pull-forward of consumer demand and demand from emerging markets.

III. Other Hardware Apart from iPhone: Mac Performs Strongly, iPad and Other Products Remain Sluggish

3.1 Mac Business

Mac business revenue for Fiscal Year 2025 Q3 (i.e., 2Q25) was $8.0 billion, up 14.8% year-over-year, exceeding market expectations of $7.3 billion.

According to IDC's report, global PC market shipments grew by 5% year-over-year this quarter, while Apple's PC shipments grew by 8.8% year-over-year, indicating the company's performance was significantly better than the overall market, primarily driven by products such as the M4 MacBook Air. Combining company and industry data, Haitun Jun estimates that the company's Mac Average Selling Price (ASP) this quarter was $1,298, up 5.5% year-over-year.

3.2 iPad Business

iPad business revenue for Fiscal Year 2025 Q3 (i.e., 2Q25) was $6.6 billion, down 8.1% year-over-year, missing market consensus expectations of $7.07 billion, primarily due to a high comparison base from the launch of iPad Air/Pro in the same period last year.

Furthermore, China's national subsidy policy had little impact on the company's iPad business. Although some iPad products also fall within the scope of the national subsidy's relatively favorable range, they still struggled to achieve positive growth this quarter.

3.3 Wearables, Home, and Accessories

Wearables, Home, and Accessories business revenue for Fiscal Year 2025 Q3 (i.e., 2Q25) was $7.4 billion, down 8.6% year-over-year, missing market consensus expectations of $7.78 billion. The Wearables, Home, and Accessories business has now declined for eight consecutive quarters, with the decline widening further this quarter, indicating that related downstream demand remains quite sluggish.

Although the national subsidy has been implemented, wearable products like watches in China are expected to benefit from policy promotion. However, the U.S. tariff policy, which cannot be overlooked, will put pressure on the Wearables, Home, and Accessories business.

IV. Services: Defying Challenges, Reaching New Highs

Services revenue for Fiscal Year 2025 Q3 (i.e., 2Q25) was $27.4 billion, up 13.3% year-over-year, exceeding market consensus expectations of $26.85 billion. The continuous growth in Apple's Services revenue also demonstrates the company's strong ecosystem moat.

It is worth noting that the company's Services business also faces some risks:

• Challenges arising from the U.S. App Store allowing external links.

• Potential impact on Services revenue from the Google antitrust lawsuit.

Given that Services revenue continued to maintain double-digit growth this quarter, the former issue regarding the App Store appears to have had minimal short-term impact on the company. As for the latter, once the case is finalized, it may have a certain impact on the company's Services revenue (with a neutral expectation of $4-6 billion annually).

Leveraging its massive user base and ecosystem stickiness, Apple, as a hardware device provider, still possesses a clear moat. It can be expected that the overall impact of these risks on the company's operations will not be too significant.

In this quarter, Services gross margin continued to maintain a relatively high level of 75.6%, staying above 75% for three consecutive quarters. Thanks to its high gross margin, the company's Services business, despite accounting for nearly 29% of total revenue this quarter, generated 47% of the company's total gross profit.

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