Apple reports record Q2 revenue of $109.4 billion, faces challenges in AI transition

Article by AIX Finance, Author | Wang Hanxing, Editor | Wei Jia

“AI giants are good, but Apple is not, and vice versa”—the U.S. stock market has been validating this statement with real money over the past month.

After hours on July 30, Apple released its third quarter fiscal 2026 earnings report (corresponding to Q2 calendar year 2026; all figures below are based on calendar year口径). This was an outstanding performance, with revenue reaching $109.417 billion, a 16.4% year-over-year increase; net profit of $29.789 billion, up 27% year-over-year; and a gross margin exceeding 50%.

Cook said this was Apple's best second quarter ever, with double-digit growth in iPhone, Mac, service revenue, and every geographic region.

But the capital markets' response was much calmer than the earnings report.

On the day of the earnings report release, Apple's stock closed down 1.41%, and after hours, its price dropped more than 8%. Just days earlier, the company had surpassed NVIDIA to reclaim the title of the world's most valuable company. On July 29, Apple's stock briefly reached an all-time high of $342.89, briefly pushing its market capitalization above $5 trillion, making it the second publicly traded company in history to reach this milestone, following NVIDIA.

In stark contrast to Apple, the AI sector is experiencing a frenzy. On the same day, Microsoft surged 15.51%, Micron rose 18.36%, AMD increased 13%, NVIDIA climbed 2.65% and continued rising after hours, while Amazon, which reported earnings around the same time as Apple, jumped over 9% in after-hours trading.

After being suppressed for weeks by the “AI bubble panic,” capital is flowing back toward assets with higher AI exposure, and Apple happens to be the tech giant with the most stumbling AI narrative.

In addition, this is Cook’s final earnings call as Apple’s CEO. On September 1, John Ternus, head of hardware engineering, will succeed him as CEO, while Cook will transition to Executive Chairman. From a market capitalization of approximately $350 billion when he took over in 2011 to today’s $5 trillion, this is Cook’s legacy. In the age of AI, can Apple deliver an even better answer?

At first glance, the numbers present a nearly flawless financial report, with hardware remaining the core driver of growth this quarter.

Q2 revenue of $109.417 billion exceeded the market expectation of $108.7 billion, with hardware product sales reaching $78.68 billion at a gross margin of 40%, and software service revenue at $30.74 billion with a gross margin of 75.6%, resulting in a consolidated gross margin of 50.1%.

However, approximately 2 percentage points of the gross margin came from a one-time impact due to the U.S. government refunding tariffs. Excluding this income, the actual gross margin was approximately 48.1%, still higher than market expectations and the midpoint of the company’s prior guidance.

Looking at products, the iPhone continued to drive this earnings report. iPhone revenue in Q2 reached $54.25 billion, up 21.7% year-over-year, marking the third consecutive quarter with growth exceeding 20%.

Notably, last year's same period already saw a relatively high baseline for iPhone sales, with a 13.5% year-over-year sales growth driven by consumers accelerating purchases and stockpiling ahead of tariff policies in Q2. Maintaining over 20% year-over-year growth on this base underscores the strong demand for the iPhone 17 series and this super product cycle.

Mac also delivered a strong performance this quarter, with revenue of $10.35 billion and a year-over-year growth rate of 28.7%, standing out notably against the broader PC industry backdrop.

According to IDC data, against the backdrop of significant price increases in upstream storage, global PC shipments declined by 4.9% year-over-year in the second quarter to 68.2 million units, marking the first decline after nine consecutive quarters of growth. Shipments from leading manufacturers such as Lenovo, HP, and Dell all declined, while Mac experienced逆势 growth of 10%, increasing its market share from 8.5% to 9.9%.

The MacBook Neo, launched in Q1 this year with a starting price of $599, has brought Apple's computer price point to a historical low, reaching a broader range of buyers. The entry-level MacBook Neo and the premium MacBook Pro together drove the growth in Mac sales this quarter.

iPad sales remain weak, with revenue of $6.19 billion, a 5.9% year-over-year decline, returning to negative growth after a brief recovery in the first two quarters.

By region, Apple's revenue in the U.S. for Q2 was $45.78 billion, a year-over-year increase of 11.1%; revenue in Greater China was $18.82 billion, a year-over-year increase of 22.4%, leading all regions, but still nearly 4 percentage points below expectations.

IDC data shows that global smartphone shipments declined by 6.7% in Q2 this year, with the Chinese market dropping 4.3%, marking five consecutive quarters of year-over-year decline. However, Apple’s shipments in China increased by 24.4% year-over-year, with its market share rising from 13.9% to 18.1%.

The recovery in the Chinese market is driven not only by the product strength of the iPhone 17 but also by preemptive purchases fueled by price expectations. While Android manufacturers generally adjusted their prices and configurations due to rising storage costs, Apple maintained stable pricing for its core models in the second quarter, thereby strengthening its relative competitiveness in the premium market.

Beyond the numbers, management delivered a reality check during the earnings call. Apple expects overall revenue in the next quarter to be pressured by foreign exchange fluctuations and supply constraints, with Q3 iPhone revenue specifically held back by supply limitations, leading to single-digit growth in the low teens. Mac and iPad products will also face disruptions from supply chain issues.

In other words, the high growth seen over the past three quarters is unlikely to continue. Nevertheless, this remains an impressive earnings report: while everyone is focused on AI, the iPhone and Mac carried Apple’s performance, with global active device installations reaching new highs across all product categories and regions. Apple has demonstrated that the value of hardware as an “entry point” remains substantial.

The question is, how long can the story of the entry still be told?

The hardware story can't go on forever, and Apple knows this, which is why it has been trying to transition into AI, although this transition hasn't been particularly successful over the past long period.

Over the past two years, Apple's AI has been more about making promises than delivering a core product capable of changing user habits.

At WWDC 2024, Apple prominently launched Apple Intelligence, proposing a distinct approach from its competitors: deep system-level personal intelligence, on-device processing with private cloud computing, and cross-app task execution.

Capital markets were once thrilled, as Apple’s valuation logic seemed poised to shift from that of a hardware company to that of an AI gateway—Apple didn’t need to lead in the parameter race for general-purpose large models; by embedding AI into billions of devices, it could redefine human-computer interaction.

However, the most critical Siri upgrades were repeatedly delayed. Apple acknowledged in 2025 that the personalized Siri launch required more time, with some features postponed to 2026.

The issue is not just “a year late.” During this phase of rapid iteration in generative AI, delays mean developers cannot plan products around stable interfaces, user expectations for Apple’s AI capabilities are repeatedly eroded, and Google, OpenAI, Amazon, and Chinese smartphone manufacturers gain a longer window of opportunity.

By 2026, Apple’s strategy had undergone a substantial shift. In January, Apple and Google announced a multi-year partnership, under which Apple’s next-generation foundational model will be built on the Gemini model and Google Cloud technology. For a company that has long championed vertical integration and in-house development, entrusting the “brain” of its AI to a longtime rival with whom it has been entangled for over two decades is both a pragmatic choice and an implicit acknowledgment that Apple can no longer afford to catch up from scratch in the large model race.

Subsequently, at WWDC in June, Apple officially launched the new Siri AI, emphasizing personal context, screen awareness, cross-app actions, and an independent conversational interface.

The development path of Apple AI in China has been more complex.

As China is Apple's second-largest market, mainland Chinese devices have long been excluded from Apple Intelligence, with regulatory registration for generative AI serving as an unavoidable barrier; the absence of AI features has been a key factor suppressing Apple's sales expectations and stock performance in China.

In March this year, Apple briefly enabled the relevant feature for mainland China users, then quickly retracted it.

In July this year, the long-awaited outcome was finalized as the Cyberspace Administration released a new list of registered generative AI services for mobile devices, with "Apple Intelligence" included. Shortly after, Alibaba confirmed that the Qwen model will be integrated into Apple Intelligence, covering the China versions of iPhone, iPad, Mac, and Vision Pro. Meanwhile, Baidu also confirmed it is collaborating with Apple to develop related features for iPhone users in China.

This means the Chinese version of Apple Intelligence will not simply replicate overseas solutions, but instead form a combination of “Apple devices and systems + local models and compliance.”

This step fills the most obvious product gap Apple has had in China’s premium market and may also unlock some suppressed upgrade demand. But it also reveals the limits of Apple’s AI transition: in the U.S., Apple relies on Google; in China, Apple depends on Alibaba and Baidu. Apple still controls the entry point, but no longer fully controls the intelligence layer.

Apple's AI assignment is still incomplete. Although the new Siri has finally moved from a "future feature" to a testable product, the real test begins only after the large-scale rollout this fall: whether its reliability is sufficient for high-frequency tasks, whether third-party developers are willing to integrate, how to control cloud inference costs, and whether AI can truly drive a new wave of hardware upgrades.

These questions do not have answers in the current financial report.

Apple's most immediate challenge is how to move beyond the elevated baseline set by the iPhone 17.

Throughout iPhone sales history, there have been multiple instances where sales of the previous generation surged dramatically, exhausting upgrade demand and leading to prolonged stagnation or decline in subsequent generations. The iPhone 6 is a classic example; at the time, analysts from Bank of America Merrill Lynch and KGI Securities explicitly noted that the "super cycle" created by the iPhone 6 prematurely consumed upgrade demand for the next one to two years, with the vast majority of users eager to upgrade to a larger screen completing their transition during this generation, leaving the iPhone 6s and 7 series unable to spark a new wave of upgrades.

The global smartphone replacement cycle has now exceeded three years, and the overspending effect brought by a super product will last even longer. From Q4 2025, when the iPhone 17 officially launched, through Q2 2026, iPhone revenue achieved more than 20% growth for three consecutive quarters, approaching the characteristics of a "super product cycle."

Apple's next challenge is not simply to sell the iPhone 18 well, but to continue growing it on an extremely high base.

The second pressure comes from cost factors. The expansion of AI data centers is competing for advanced process, DRAM, and NAND capacity, forcing consumer electronics manufacturers to vie with cloud giants for upstream resources for the first time. According to data from TrendForce, DRAM contract prices rose more than 90% quarter-over-quarter in the first quarter of 2026; the cost of 12GB smartphone memory increased from 200 yuan to 600 yuan, and the unit price of 1TB flash storage tripled. The pressure initially hit entry-level devices and is now spreading upward along the price spectrum.

In its previous report, IDC stated that this storage crisis is dividing the smartphone market into two camps: manufacturers with scale, long-term procurement capabilities, and a premium product portfolio can secure supply and pass on costs, while brands relying on low-priced, high-volume sales are suffering greater impacts. Apple clearly belongs to the former, but this does not mean it is immune.

Previously, Sumit Sadana, Chief Business Officer of storage giant Micron, told the media that the root cause of the storage shortage lies in the aggressive price pressures from downstream major customers; excessively low purchase prices discouraged manufacturers’ investment intentions, leading to the cancellation of numerous expansion projects in 2023.

This statement was interpreted by outsiders as shifting the blame for the price increase onto Apple.

Recently, Apple has raised prices for certain Mac and iPad models, and management has warned that supply constraints will significantly worsen next quarter.

The third pressure is competition in AI terminals.

In the past, Apple could afford to wait for technology to mature before entering the market, thanks to its stronger product integration capabilities and user base, but competition in AI phones does not strictly follow traditional hardware timelines.

Google, Samsung, and Chinese manufacturers are turning model capabilities into system-level features; agents are beginning to take over search, shopping, content generation, and app operations. At the recently concluded WAIC, Nubia, StepFun, and Honor unveiled their AI-powered phones together.

AI phones are becoming a trend; if users no longer frequently open apps but instead complete tasks through AI assistants, whoever controls the assistant may rewrite the allocation of mobile internet traffic. Apple has the advantage of being the entry point, but it also faces a risk: if Siri is not good enough, the iPhone could become nothing more than a high-quality hardware shell for other models, or be directly replaced by other AI phones.

Image source / Apple Siri official website

The fourth pressure is a leadership change. On September 1, Cook will officially step down as CEO and assume the role of Executive Chairman. Technically, he could still lead for one additional fiscal quarter, but it is certain that this will be his final earnings call as CEO.

The successor, Tenus, is 50 years old and joined the product design team in 2001, contributing to the development of AirPods, iPad, and multiple generations of Mac and iPhone. Cook described him as having “the mind of an engineer and the soul of an innovator.” A CEO with a product background taking the helm suggests that Apple’s cultural focus may shift back from operational efficiency to product innovation.

Fifteen years ago, Jobs handed over a company worth $350 billion to Cook, and the outside world questioned how long Apple could survive without its obsessive product genius. Fifteen years later, Cook is handing over a company worth $5 trillion to Ternus, and the question has become: as AI redefines the concept of entry points, can Apple continue to hold onto them?

This is the best second-quarter earnings report in history—the final report card from Cook and the first exam for the new CEO.