Apple's AI Strategy and Financial Performance in Q2 2026

By Shan Shang, Author: Xue Xingxing, Editor: Jiang Jiao

While tech giants like Meta and Google face scrutiny over their ever-growing AI capital expenditures, Apple’s lackluster AI efforts have become a standout feature.

This week, Apple surpassed NVIDIA to reclaim the title of the world’s most valuable company, with its market capitalization briefly exceeding $5 trillion. Ahead of its earnings report, Apple’s stock has risen over 24% this year, making it the only member of the “Magnificent Seven” U.S. tech stocks to achieve double-digit growth.

This is somewhat ironic. Over the past two years, Apple has suffered one setback after another in the field of AI: Apple Intelligence has been repeatedly delayed, key AI talent has continuously departed, and it ultimately had to rely on Google’s Gemini and Alibaba’s Qwen for implementation. In the words of domestic car manufacturers, this amounts to handing over its very soul.

But as competitors' AI spending wars become increasingly extravagant and reckless, investors are growing anxious about whether these investments will ever yield returns. Although Apple lags behind in AI, it also carries no heavy capital expenditure burden. Once criticized for its slow AI progress, Apple is now praised for its disciplined restraint.

This is probably what’s meant by being highlighted by the competition—even standing still can feel like leading.

However, market enthusiasm did not last long. At 3:00 AM Beijing time on July 31, Apple released its fiscal third quarter 2026 (calendar second quarter) earnings report, with revenue from iPhone, Mac, and other businesses significantly exceeding market expectations, driving a 16% year-over-year increase in total revenue—the highest on record for the period.

However, after the earnings release, Apple's stock dropped more than 8% in after-hours trading. Meanwhile, Microsoft, NVIDIA, and Amazon saw significant rebounds. Microsoft surged 15.51% in a single day, and Amazon, which also reported earnings alongside Apple, rose over 10% in after-hours trading.

Looking solely at the current quarter, Apple delivered a highly impressive earnings report, with multiple metrics reaching all-time highs for the same period. The report showed that Apple’s revenue for the quarter reached $109.417 billion, a 16.4% year-over-year increase, and its net profit amounted to $29.789 billion, up 27.1% year-over-year.

Cook proudly announced in the press release, "We delivered our strongest June quarter ever, with double-digit revenue growth across iPhone, Mac, all services, and all geographic regions."

The iPhone and Mac once again saved Apple, collectively accounting for approximately 78% of the company’s revenue growth this quarter, serving as the primary driver of revenue expansion. iPhone revenue increased by 21.7% year-over-year to $54.252 billion, contributing about 63% of Apple’s revenue growth. The iPhone’s share of total company revenue rose from 47.4% in the same period last year to 49.6%.

Apple earnings report

Omdia previously released data on global smartphone shipments for the second quarter of 2026, showing that although global smartphone shipments declined by 6% year-over-year, Apple achieved a 23% year-over-year growth, ranking second globally and recording its highest shipment volume for the same period. In comparison, Samsung’s market share increased by only 5%, while Xiaomi, OPPO, and vivo all experienced significant declines, with Xiaomi’s year-over-year drop reaching 26%.

Despite the escalating marketing hype around AI phones, consumers continue to prioritize hardware performance and product design—and even Siri’s limitations have done nothing to slow the iPhone’s sales.

Although Mac's absolute revenue contribution did not match that of the iPhone, its growth rate significantly exceeded market expectations. In the quarter, Mac revenue increased 28.7% year-over-year to $10.352 billion, surpassing market expectations by 18.4%. This achievement was made despite constraints in high-end chip production and supply shortages for certain Mac products. Apple's management previously noted that demand for the MacBook Neo far exceeded expectations, and products such as the Mac mini and Mac Studio also saw strong sales driven by demand from AI developers.

Apple achieved double-digit growth in nearly all markets worldwide, with revenue increasing 11.1% year-over-year in the Americas, 22.4% in Europe and Greater China, 13.4% in Japan, and 15.6% in other Asia-Pacific markets. However, revenue growth in Greater China this quarter slightly missed market expectations and was lower than the 28% growth recorded in the previous quarter.

Apple earnings report

Apart from the iPhone and Mac, Apple’s other businesses performed relatively flat. iPad revenue declined 5.9% year-over-year to $6.191 billion, the only product line to see a year-over-year decrease, which Cook attributed to last year’s high base driven by the entry-level iPad. Revenue from wearables, home, and accessories increased 6.5% year-over-year to $7.883 billion.

Despite product revenue growing 18.1% year-over-year, Apple's service revenue for the quarter reached $30.739 billion, a mere 12.1% year-over-year increase—below both the company's overall growth rate and market expectations. In comparison, Apple's service revenue growth in the previous quarter was 16.3%.

The growth of the service business has slowed, partly because the "Apple tax" is loosening. Over the past few years, an increasing number of countries and regions have begun challenging the closed ecosystem of the App Store.

The European Union has required Apple to open its platform to third-party app stores, and the lawsuit between Epic Games and Apple has also forced Apple to allow external payment links in the U.S. In March of this year, under domestic regulatory pressure, Apple reduced its commission rate for the China App Store.

The gross profit margin for service business reached 75.6%, significantly higher than the 40.1% for product business. The slowdown in its growth has somewhat affected Apple's profitability. Apple's gross profit margin last quarter was 49.3%, and this quarter, after deducting tariff refunds, it was approximately 48.1%, representing a actual sequential decline of about 1.2 percentage points.

However, Apple’s services revenue may increase with the rollout of the new Siri. The updated Siri with AI and Apple Intelligence are set to launch next quarter; Cook hinted on the earnings call that some AI features may require payment due to rising compute costs.

Although Apple delivered a strong quarterly earnings report with impressive growth, the market generally held a pessimistic view. After the earnings announcement, Apple’s stock plunged more than 8% in after-hours trading.

The direct trigger is Apple's pessimistic guidance for the next quarter. Apple expects revenue growth of only 9% to 11% year-over-year for the next quarter, below market expectations. Apple management stated during the earnings call that, aside from the impact of exchange rate fluctuations, the negative effects of supply chain constraints will worsen quarter-over-quarter after the third quarter, adversely affecting the iPhone, Mac, and iPad business lines.

Cook stated that supply chain constraints are primarily focused on the Mac product line, with the root cause being extremely strong market demand that exceeds their current production capacity. “We will face significant pressure on the supply chain in the next quarter.” Apple’s M-series chips are primarily manufactured by TSMC, but TSMC’s capacity is increasingly being allocated to AI chips.

Previously, Apple had to significantly increase prices across many product lines, including Mac and iPad, due to rising memory and chip costs, with some products seeing price hikes of over 3,000 yuan. During the earnings call, Cook described the current surge in memory prices as a once-in-a-century flood, exhibiting exponential growth, forcing them to adjust pricing.

However, the last price increase did not include Apple’s most important product line: the iPhone. Analysts expect Apple’s upcoming iPhone models, set to be released this fall, to see significant price hikes, with the starting price of a foldable iPhone potentially exceeding $2,000. The strong sales of iPhones last quarter may have been partly driven by panic buying from consumers ahead of the price adjustment—especially considering that the upcoming new models are about to launch, and the second quarter is typically a slow sales period for iPhones.

Under pressure from price increases, external confidence in next quarter’s iPhone sales remains weak. Apple’s management has provided a revenue growth guidance for next quarter’s iPhone sales of approximately 15%, below Wall Street’s expectation of 17.6%.

Apple has been preparing for increasingly severe supply chain constraints. This quarter, Apple’s inventory rose to $11.092 billion from $6.747 billion in the previous quarter, a 64.4% sequential increase, and an 87.2% year-over-year rise from $5.925 billion in the same period of the prior fiscal year, nearly doubling.

According to Bloomberg, Apple is negotiating with CXMT and YMTC to purchase memory chips. However, this move has faced opposition from the U.S. government and Micron Technology. Cook stated on the earnings call that the global DRAM market is currently dominated by three companies—Samsung, Micron, and SK Hynix—and adding more suppliers would help improve supply and pricing.

Not spending money on AI doesn’t allow Apple to stay out of the AI frenzy. Record-breaking AI data center construction by tech giants like Microsoft, Google, Amazon, and Meta will directly impact Apple’s memory and chip supply, leading to reduced revenue.

Currently, the annual AI capital expenditures announced by Microsoft, Google, Amazon, and Meta alone are set to exceed $720 billion, far surpassing last year’s $455.8 billion. This massive investment in AI has directly led to negative free cash flow for Google and Amazon in the quarter, while Meta’s free cash flow plummeted by 91%.

In comparison, Apple's capital expenditures this year have not only failed to grow but have also declined. In the first three quarters of fiscal year 2026, Apple spent only $6.799 billion on purchasing fixed assets, a 28.2% year-over-year decrease.

Apple earnings report

Conservative capital expenditures helped Apple achieve a record-high operating cash flow for the quarter, with operating cash flow reaching $117 billion over the first nine months of this fiscal year, a 43.1% year-over-year increase. Cook, true to his reputation as a master of capital management, continues to help the company save money even as he nears retirement.

This does not mean Apple undervalues AI investment. Compared to other manufacturers that are more focused on investing in AI computing power, Apple’s investments appear to be more directed toward research and development.

This quarter, Apple's research and development expenses reached $11.729 billion, a 32.3% year-over-year increase, roughly double the growth rate of its revenue. For the first nine months of fiscal year 2026, Apple's R&D expenses totaled $34.035 billion, up 32.5% year-over-year.

However, such massive investment in R&D ultimately yielded few significant AI results—this, too, is another kind of “Only Apple can do.”

This is Cook's final appearance at Apple's earnings call. In September, he will officially step down as Apple's CEO. During the earnings call, Cook specifically expressed his gratitude to the public: "Thank you to all of our shareholders, especially our long-term shareholders who have trusted us over the years."

He said he has full confidence that Apple's future is bright.