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Here's How Memory Pricing Is Hurting Apple Inc.'s Business

Over the last year, the prices of memory products have soared. This has been great for companies that make and sell memory, but it's made life tougher for companies that design memory into their products. They've had to increase prices of their products, accept lower profit margins, or some combination of the two.

On Apple's (NASDAQ: AAPL) most recent earnings call, company CFO Luca Maestri quantified the impact that increased memory prices is going to have on the company's gross profit margins in the current quarter.

Image source: Apple.

Let's take a closer look at Maestri's comments. 

Translating margin points into dollars

Apple says that for its current quarter -- that's the first quarter of fiscal year 2018 -- the memory pricing environment is leading to a 110-basis-point reduction in the company's overall gross profit margin percentage.

For some context, Apple says that it expects a gross profit margin percentage of between 38% and 38.5% for the current quarter. If memory prices didn't budge from where they were last year, then Apple would be guiding to a gross profit margin percentage of between 39.1% and 39.6%.

Although it might seem like a 110-basis-point gross margin percentage decline isn't a big deal, it starts to look a lot bigger when translated into dollars.

Apple says that it expects revenue of between $84 billion and $87 billion in the current quarter, so thanks to higher memory prices, the company is losing out on between $924 million and $957 million in gross profit. That additional gross profit would translate entirely into operating income, because there'd be no additional operating expenses associated with it.

This means that Apple is expecting to lose out on nearly a billion dollars in profit this quarter thanks to elevated memory prices.

Bigger-picture impact

Although the financial impact of higher memory prices is evident, there's a bigger-picture impact, too: Apple's ability to pack more memory into its products.

As far as memory used for storage goes, this isn't that big of a problem. Apple has always offered variants of its iPhones with different amounts of storage, and it usually charges extra for products with additional storage, so Apple is generally able to profit handsomely from devices with additional memory content.

The same isn't true for DRAM, which is the type of memory that's used as primary system memory. Apple doesn't generally disclose the amount of DRAM that it includes in its devices, but since the amount of memory in a device directly impacts performance, Apple can't really use DRAM content as a selling point.

Instead, Apple seems to endow its iOS devices with the amount of DRAM required deliver the desired user experience -- no more, no less.

High DRAM prices will make it difficult for Apple to increase the amount of DRAM that it includes in its iPhones and iPads. Now, I don't think Apple would sacrifice the user experience that it delivers just to avoid paying more for DRAM content, but the company's margins could suffer even more once it needs to increase the amount of DRAM in its devices.

Apple could, of course, raise device prices to try to compensate for the increased DRAM content, but such increases could negatively impact demand.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.