The real story at Apple is the memory crunch — and there's little room for error

It's a high-stakes quarter for Apple. As always, the headline numbers will be important when the iPhone maker reports fiscal 2026 third-quarter earnings after the bell on Thursday. But investors will be even more focused on the industry's memory shortage and how outgoing CEO Tim Cook and his team are managing it. With the stock trading near all-time highs, there's little room for error. The best place to look for clues: the forward guidance delivered by Apple's management team at the end of the post-earnings call with analysts. And, in particular, the gross margin forecast should reveal how it's planning to deal with the rising cost of the memory chips used in its devices. Gross margin measures how efficiently a company manages production costs relative to its sales revenue. As memory prices increase, Apple's cost of goods sold rises directly with them. Because strong revenue can easily mask rising input costs if Apple sells more devices or raises prices, gross margin strips away that top-line noise to answer one vital question: Is the company absorbing higher input costs, or is it preserving its profit per device? This outlook will be important because it's unlikely Apple will announce it's raising iPhone prices, something analysts say it will likely have to do. Instead, any new prices are likely to be announced at the launch event for its new iPhone 18 lineup in September. If management guides gross margins higher during this period of supply shortages and rising memory costs, it shows Apple's exceptional pricing power. It also signals to investors that Apple can pass cost increases directly to consumers without hurting demand. Higher gross margin guidance would be a positive. It means Apple keeps a larger portion of revenue from every sale after covering its direct cost of goods sold. Back in April, Apple guided third-quarter gross margin to be in a range of 47.5% to 48.5%. We'll see if the company meets, beats, or misses that target. Since Apple only provides guidance one quarter out, following Thursday evening's Q3 release will give us visibility solely into the (current) fiscal fourth quarter. "I think what might be interesting is you know [memory prices are] going up, up, up, and Apple had been eating that before the [device] price increases," Jim said during Thursday's Morning Meeting . "So, it's very possible the gross margins would actually expand here." The market, however, is sensitive to these price hikes. After Apple raised prices on MacBooks and iPads in June, the stock suffered its single-worst session in more than a year. Cook previously warned that hikes were "unavoidable," but the increases of 17% to 25% sparked fears of a slowdown in demand. Let's hope that a higher gross margin guide Thursday evening would assuage those concerns. Of course, a miss on gross margin – or weakness in their product gross margin – means the company will be making less profit per device . Analysts at Jefferies are worried about such a scenario, and expect the profit margin on each iPhone 17 to drop by 4 to 9 percentage points as component costs rise against flat sale prices. Even if Apple raises prices by 18% to 26% on higher-end models like the iPhone 18 Pro and Pro Max, Jefferies estimates gross margin will still contract by 3.5 percentage points. "Soaring memory cost is a big headwind to AAPL," analysts said in a recent note. "AAPL will likely struggle to balance between [volume] and margin in the next 18 months." Apple isn't alone. Many mega-cap technology companies are under pressure as memory and storage prices have multiplied over the past year. Hyperscalers have swallowed up production capacity to feed energy-intensive AI data centers, squeezing supply for consumer electronics giants like Apple. Microsoft, another Club name, saw its stock tumble briefly in June on news of higher prices for Xbox consoles due to the crunch. To be sure, some investors are less focused on the gross margin guide. D.A. Davidson's Gil Luria said iPhone growth will be "the most important thing" this quarter. "Are we still growing iPhone sales double digits as we have for the last couple of quarters? That's really been the key driver of the stock," Luria told CNBC. AAPL YTD mountain Apple YTD Despite potential memory-related headwinds, there are plenty of reasons to remain confident ahead of Apple's release. Apple's sheer scale and long-standing supplier relationships give it unmatched leverage over other tech behemoths. "I would think their peers would need to raise prices as well, probably even more than Apple because they just don't have the bargaining power to negotiate input prices as Apple has," portfolio director Jeff Marks said last month. Plus, because the June price increases don't take effect until August, they won't weigh on this quarter's device sales. Goldman Sachs took an upbeat view this week, arguing that the hikes "reinforce longer-term earnings growth over the next few quarters as we believe Apple's user base is relatively price inelastic given brand stickiness, U.S. carrier subsidies, and availability of recent low-cost product launches." Apple also has a hedge against pressure on hardware sales: its services business. The services unit, which generates revenue from the App Store, Apple Music, Apple TV+, iCloud, and search licensing fees, is less impacted by rising memory costs. It can help offset any demand destruction in hardware, as well as any margin crunch on product lines that don't get a price increase. This high-margin business is a big reason why we love Apple. Driven by a growing installed base of active devices, services has consistently delivered durable revenue growth and reliable recurring cash flow. That services momentum will remain important because it doesn't look like this memory squeeze is going away anytime soon. Just look at recent earnings from the industry's biggest players. Memory giant Seagate Technology delivered a blockbuster quarter Tuesday that trounced analysts' expectations for revenues, earnings and first-quarter outlook. "As AI accelerates data generation and its value, we see durable long-term demand for mass capacity storage," CEO Dave Mosley said. The results, according to Jim, also highlight just how robust demand for AI-related storage and memory continues to be. "Orders were amazing, and the forecast was fabulous," he said during "Squawk on the Street" on Wednesday. The stock jumped over 2% in a session. The market had a different reaction to SK Hynix 's quarter, which fell 8% Wednesday, despite its explosive earnings growth. The South Korean memory chipmaker just couldn't satisfy analysts' sky-high expectations. "You can't really say 'Wow, things aren't that good,'" Jim added during Wednesday's Morning Meeting. "But that was the conclusion that people reached." At the same time, Apple may have another catalyst on the horizon in its improved AI strategy, which features a better Siri. Following a lackluster rollout that weighed on shares throughout 2025, Apple's AI story rebounded in 2026. That's been a big part of its outperformance, up over 24% year to date, compared to the S & P 500 's nearly 7% advance. It started in January, when Apple announced a partnership with Alphabet to power its AI features using Google's Gemini. Although the iPhone maker pays roughly $1 billion annually for the deal, it pales in comparison to what Google pays Apple for its search placement. The agreement, in turn, lets Apple bypass the tens of billions of dollars in capital expenditures rival tech giants are pouring into the AI buildout. "This is a great opportunity to realize that they happen to get the premier AI by dealing with Gemini," Jim said around the time of the announcement. The deal began to really pay six months later at Apple's developers conference, when management unveiled an upgraded, conversational Siri powered by Gemini. The upgraded Siri, which is scheduled for release later in 2026, gives customers another reason to buy heading into the next iPhone upgrade cycle. That stock momentum recently pushed Apple past a historic $5 trillion market cap on Tuesday. It's the second U.S. company in history to do so with Club name Nvidia. With shares lingering at record highs on Thursday – securing several record closes over the past month – there is little room for error. Now, we'll see if Apple and Cook, in his final act as CEO, can deliver once again. (Jim Cramer's Charitable Trust is long AAPL, MSFT, GOOGL, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.