Apple’s record quarter meets a less cosy 2026 cost outlook

Key takeaways

• iPhone demand looks stronger than expected, with China bouncing back sharply.

• Services stays solid, but hardware weak spots show where upgrades still hesitate.

• The outlook beats expectations, yet rising component costs threaten margins.

Apple’s results land with a familiar Apple twist. The headline is strong, almost celebratory. Then management points to the next challenge, quietly, like it is reading the warranty terms at the bottom of the box.

The company posts record quarterly sales for the period ended 27 December 2025, helped by strong demand for the new iPhone 17. It also gives a better-than-expected outlook for the March quarter. But it flags rising component costs, especially memory, as a growing headwind for gross margin. The market reaction reflects that mix: impressed by demand, alert to the bill.

Apple does not only sell devices. It sells timing. This quarter shows Apple nailed timing on demand. Next quarter tests whether it can keep the feel-good story while costs move the other way.

The headline: iPhone strength does the heavy lifting

Apple reports revenue of 143.76 billion USD, up 16% year on year, above the 138.4 billion USD Bloomberg consensus estimate. Earnings per share (EPS) are 2.84 USD versus 2.68 USD expected.

The iPhone is the centre of gravity. iPhone revenue is 85.27 billion USD, up 23%, beating the 78.31 billion USD estimate. That is not a small “holiday season went fine” signal. It is Apple telling you the upgrade cycle still works when the product lands well and the ecosystem stays sticky.

China is the other headline. Greater China revenue is 25.53 billion USD, up 38%, well above the 21.82 billion USD estimate. Apple does not need China to be perfect every quarter, but the market uses it as a confidence gauge. A rebound here makes the whole story feel sturdier, even if other lines are softer.

Tim Cook’s tone matches the numbers. He calls iPhone demand “unprecedented”. That is classic Apple: avoid drama, then pick one strong word when it matters.

The mix: services stays steady, but hardware is not equally loved

The most “Apple” part of the quarter is the mix. Apple is not one business. It is a portfolio that behaves differently depending on where consumers put their attention.

Services comes in broadly in line with Bloomberg consensus, and that is exactly the point. It does not need to be dramatic to be valuable. Services is Apple’s “second engine”, the one that keeps running even when people skip an upgrade. Subscriptions, payments, and the App Store ecosystem quietly turn a one-off device sale into an ongoing relationship. When hardware demand gets bumpy, services tends to make the whole business feel calmer.

The hardware mix tells a more uneven story. iPhone does the heavy lifting, while some categories look less urgent. Mac demand appears selective, which fits a world where many consumers and companies upgraded earlier and can afford to wait. Wearables and accessories look more like discretionary treats, the kind of purchases people delay when they feel less confident. iPad is the brighter spot, suggesting practical upgrades still find buyers even when “nice-to-have” categories cool.

In short, Apple gets the big win where it matters most, and it keeps the ecosystem humming in the background. That combination is why the quarter feels strong without needing every product line to cooperate.

One more datapoint helps explain Apple’s resilience. Cook says the installed base now has more than 2.5 billion active users. Apple does not just sell products. It holds an audience. That audience is what services monetises over time.

The outlook: strong momentum, then a margin warning

The quarter is the rear-view mirror. The share price is the windscreen.

For the March quarter, Apple says revenue will rise 13% to 16%, above the 10% growth Wall Street projected. That is the “momentum” line. It suggests the company does not see demand falling off a cliff right after a strong holiday season.

Then comes the part that puts investors back in their seats: costs. Apple warns that rising memory prices should have “more of an impact” on gross margins in the current period. In plain English, Apple expects the ingredients to get more expensive, even if the menu is selling well.

There are also practical constraints. Apple flags supply chain constraints related to the iPhone’s 3-nanometre processor and supplies for AirPods Pro 3. It also says tariffs created a 1.4 billion USD headwind in the holiday quarter.

This is the strategic tension for 2026. Apple wants to keep demand strong, protect margins, and invest in its next platform moves, including a refreshed artificial intelligence push after recent stumbles. Those goals can coexist, but not effortlessly. When costs rise, execution has to get tighter.

Risks

The first risk is a margin squeeze that outlasts one quarter. Memory inflation sounds niche, but it can pressure profitability if Apple cannot offset it through mix, pricing, or supply chain efficiencies.

The second risk is that iPhone strength reflects some pull-forward of demand. If consumers upgraded earlier than usual, later quarters can look softer even if the business stays healthy.

The third risk is product and platform timing. Apple faces pressure to show progress on artificial intelligence features without breaking what makes the ecosystem trusted and simple. Investors will watch for clarity without overpromising.

Investor playbook

• Focus on mix, not only the headline beat: iPhone and China versus wearables and Mac tell you where urgency sits.

• Treat services as the stability layer: steady growth here matters more when hardware is uneven.

• Watch gross margin commentary closely: rising input costs often show up in tone before numbers.

• Use the March-quarter outlook as the real signal: it frames whether demand is durable or seasonal.

The upgrade cycle is back, the margin test begins

Apple’s quarter looks like a clear demand win: iPhone demand surprises to the upside, China rebounds, and services keeps doing its quiet, high-quality job. The outlook also beats expectations, which is Apple’s way of saying momentum continues into early 2026.

But Apple also reminds investors that strong demand does not guarantee easy profits. When memory prices rise and supply constraints appear, gross margin becomes the real battleground. This is the Apple story in one line: it sells premium products, then fights to keep the premium economics. The quarter shouts “demand”. The outlook whispers “costs”. In 2026, the stock will likely follow whichever voice gets louder.