Apple's pricing power is expected to translate into higher earnings

Overview

This report focuses on Apple's pricing power amid a significant increase in memory costs. Morgan Stanley believes that demand for Apple's core hardware has historically been relatively insensitive to price. Recent price increases for non-iPhone products have not materially changed Mac and iPad delivery timelines or affected iPhone production plans. Therefore, higher prices are more likely to translate into higher revenue and profitability rather than significant demand damage.

Core views

The core view is that “higher prices lead to higher earnings.” The report believes that the iPhone is the least price-elastic category in Apple's product portfolio, while demand for Mac and iPad is also relatively resilient. Non-iPhone products were repriced by 15%-30% in late June 2026, indicating that Apple is using pricing to protect gross margins. If the starting prices of models such as the iPhone 18 Pro increase by $200 year over year, combined with a higher mix of premium models, contributions from a Foldable iPhone, and delayed launches of lower-priced models, Apple may be able to maintain relatively stable product gross margins in FY27, creating upside risks to C3Q26 and FY27 EPS.

Analysis framework

The report uses three main analytical approaches: first, reviewing historical price increase cycles for Apple's mainstream hardware and estimating the elasticity between prices and shipment volumes; second, combining IDC shipment mix data, DRAM/NAND cost assumptions, and BOM estimates to assess whether price increases are primarily intended to offset memory cost inflation and protect gross margins; and third, incorporating pricing, product mix, inventory cost recognition lags, and the timing of future product launches into the earnings model to assess the potential impact on C3Q26 and FY27 EPS.

Methodology notes

• Demand elasticityHistorical price elasticity analysis

  Price elasticity

  The sensitivity of iPhone, Mac, and iPad demand to price increases is estimated through the relationship between price changes and shipment changes during previous product cycles. The report notes that the sample is limited, so the conclusion is better suited as a directional assessment.

• Costs and gross marginIncremental BOM gross margin estimate

  Incremental gross margin

  Using the iPad, MacBook Air, and iPhone 18 Pro as examples, the analysis offsets the price increase against incremental memory costs to determine whether the price increase is sufficient to protect product gross margins.

• Valuation methodsEV/Sales and P/E valuation

  Price target derivation

  The $360 price target is based on a FY27 9.1x EV/Sales multiple and corresponds to approximately 35x FY27 EPS of $10.30.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Apple, Inc. (AAPL.O)

  Core covered company; the report maintains an Overweight rating and a $360 price target.

  Strengths

  Strong brand pricing power, historically low iPhone demand elasticity, continued double-digit growth in Services revenue, and premium product mix and an AI replacement cycle expected to support FY26-FY27 growth.

  Weaknesses

  Near-term exposure to sharply rising memory costs, product gross margin pressure, and uncertainty over the realization of the iPhone replacement cycle.

  Comparison

  Compared with the more discretionary Mac and iPad, iPhone demand is less affected by price increases. The report uses a technology and consumer platform peer regression to derive the FY27 EV/Sales multiple.

  Risks

  Weakening consumer spending, continued increases in memory costs, insufficient progress in AI features, geopolitical tensions, and regulatory pressure on the App Store.

Key data

• RatingOverweightMorgan Stanley maintains a positive rating.
• Price target$360.00Based on FY27 9.1x EV/Sales and approximately 35x P/E.
• Current share price$317.31Closing price as of 2026-07-13.
• Historical iPhone price elasticity0.2-0.5The report states that iPhone demand is the least price-elastic within Apple's product ecosystem.
• Historical Mac/iPad price elasticity0.8-1.0Mac and iPad are more discretionary than iPhone and therefore have higher price elasticity.
• Non-iPhone product price increase15%-30%Apple raised prices on certain Mac, iPad, and accessory products on 2026-06-25.
• Potential increase in the iPhone 18 starting price$200The report believes this increase is more likely than the $100 assumption in the model, particularly for Pro models.
• Potential C3Q26 EPS upside2%-4%Driven by higher revenue, relatively stable gross margins, and a premium product mix.
• FY27 EPS forecast$10.30The report believes that price increases could provide approximately 1% upside from this base.

Impact & implications

For investment implications, the report reinforces Apple's pricing power and earnings resilience. During a period of rising memory costs, the market is concerned that price increases could suppress demand, but Morgan Stanley believes that demand elasticity and supply chain signals do not support significant demand destruction. If Apple successfully passes costs through via the iPhone 18, Foldable iPhone, and a premium product mix, support for FY27 earnings and valuation could strengthen. However, if memory costs rise more than expected or consumer spending weakens, the positive EPS contribution from price increases could be reduced.

Risks

• Weakening consumer spending could limit iPhone upgrade rates.
• Memory input costs exceeding model assumptions could offset gross margin improvements from price increases.
• Apple Intelligence and Siri AI feature development could fall short of expectations.
• Geopolitical tensions could affect the supply chain, demand, or the regulatory environment.
• Businesses such as the App Store face increasing regulatory pressure.
• If price increases are excessive or the macroeconomic environment weakens, demand elasticity could be higher than historical estimates.

What to watch

• June-quarter results and September-quarter guidance.
• The launch of the iPhone 18 Pro, iPhone 18 Pro Max, and Foldable iPhone in September.
• The public beta release of Siri AI and expansion of Apple Intelligence features.
• Whether Mac and iPad delivery timelines remain stable.
• Whether iPhone production plans are revised upward or downward.
• Whether Services revenue growth reaccelerates.
• Memory cost trends and the timing of Apple's inventory cost recognition.