A record quarter, and a downgrade about next year's margins
Apple's strongest June quarter ever, then a Jefferies cut to Underperform three weeks later. The two are not in conflict: the quarter was about the installed base, the downgrade is about what a sixfold rise in memory prices does to iPhone margins from here. A higher-risk buy — long on momentum and a level, not on conviction about the next five years.
13 Aug 2026 · Q3 FY26 earnings and Jefferies downgrade · 3 min read
Sources
Summary
Q3 was Apple's strongest June quarter on record: revenue of $109.4bn, up 16%, diluted EPS of $2.02, up 29%, and gross margin of 50.1%, with iPhone up 22% and Services up 12%. Read that margin carefully — roughly two points of it, and $0.11 of the EPS, came from tariff refunds that will not repeat. On 10 August Jefferies moved the stock from Hold to Underperform with a $263.66 target, and that call, not the print, has been setting the price since.
| Metric | Reported | YoY |
|---|---|---|
| Revenue | $109.4bn | +16% |
| Diluted EPS | $2.02 | +29% |
| Gross margin | 50.1% | incl. ~2pts tariff refunds |
| Operating income | $35.7bn | +27% |
| iPhone | $54.3bn | +22% |
| Services | $30.7bn | +12% |
| Mac | $10.4bn | +29% |
| iPad | $6.2bn | -6% |
Positives and negatives
Positives
- The base business is not the problem. iPhone up 22% and Services up 12%, records across iPhone, Mac and Services, and an all-time high installed base. Nothing here says demand is the issue.
- Operating leverage is intact. Operating income up 27% on 16% revenue growth, and that gap holds before any argument about the refund benefit.
- The base has absorbed price rises before. Every dip in this name has been bought, and the evidence so far is that a sticky customer base pays what it is asked to.
Negatives
- Memory is the squeeze, and it is severe. A gigabyte of the LPDDR5X used in phones went from about $2.80 in 2025 to roughly $12 now — close to sixfold. Google has already passed it on: the Pixel 11 Pro is up $100 to $1,099 and the Pro XL starts at $1,299, with less RAM than last year's model. Apple faces the same input curve, and the memory names on the stats board are pricing it in real time — the run in Micron and the memory ETF is the same fact as Apple's margin problem, seen from the other side.
- The pricing lever just got weaker. The all-glass iPhone appears cancelled on low yields, removing the premium device meant to lift average selling prices into exactly this cost environment. Jefferies cut its FY26–31 iPhone ASP growth assumption to 6.8% from 9.0% on the back of it.
- Reported margin flatters the run rate. Strip the two points of tariff refunds and underlying gross margin is nearer 48% — the number the next few quarters must defend while component costs climb.
Conclusion
I am not especially optimistic about Apple's path from here relative to the other mega caps, and the downgrade is a fair piece of work. The mechanics are right: memory prices are climbing hard, the all-glass device is gone, and this quarter's margin had help it will not get again. The Pixel 11 is the tell — Google raised prices and cut RAM in the same product, which is what this cost curve does to a handset maker. Expect the next iPhones $100–200 higher, and the foldable somewhere near $2,500, which prices most people out even if it eventually becomes the ASP driver everyone wants it to be.
Against that, the stock keeps rolling. Every dip gets bought, the installed base looks willing to absorb higher prices, and market momentum is strong enough that it will probably carry Apple along with it. At $305, about 11% below the high, that is enough to be long — but on momentum and a level, not on a five-year view.
So: sold the October 275 put, roughly 10% below spot and a level that held on the last dip, using the credit to hold the 340–355 call spread. If it trades down there I am happy to take the shares at that price. I am looking for a bump back to $320–330 to come out. Call it a higher-risk buy — the rating reflects being 11% off the highs and the momentum behind it, not conviction that the margin story ends well.
Rating and trade idea
Buy- Structure
- Custom — short put financing a call spread
- Strikes
- 275P / 340–355C
- Expiry
- Oct
- Credit / debit
- $115 credit
- Max risk
- $27,385
What proves this wrong
Memory pricing continuing to climb into the iPhone 18 build, or gross margin guided below the high-forties once the tariff-refund benefit rolls off.
In the portfolio
- AAPL Custom · 275P 340-355C · opened 10 Aug '26Open