A reminder from Apple, should Wall Street need a refresher: There exists a memory shortage. Apple CEO Tim Cook on Thursday warned that headwinds from a memory supply crunch are only getting stronger—and not just for the rest of the first half. “Beyond the June quarter, we believe memory costs will drive an increasing impact on our business,” Cook articulated to analysts during Apple’s quarterly earnings call Thursday, as noted in a transcript. The potential impact on profits is notable: The company has projected gross margins for the June quarter to range between 47.5% and 48.5%, reflecting a sequential decline from over 49%. Apple on Thursday reported results that exceeded expectations on both revenue and earnings, yet indicated that the memory shortage was already exerting pressure on profits. Gross margins on its products decreased by two percentage points to 38.7%, “driven by a seasonal loss of leverage and higher memory costs,” stated Kevan Parekh.

Last quarter, the company’s overall margins experienced an expansion, primarily driven by its services segment, which reported margins surpassing 76%. Memory has emerged as a highly sought-after commodity in Silicon Valley and on Wall Street over the past year, largely due to a supply crunch fueled by the increasing demand from AI data centers. The hyperscalers—Alphabet, Microsoft, Amazon, Meta, and Oracle—are anticipated to allocate over $700 billion towards infrastructure in the current year. The financially robust technology corporations are offering substantial premiums to acquire memory, resulting in increased prices. Provider of flash memory solutions Sandisk on Thursday reported quarterly revenue of $5.95 billion, a 251% increase from the prior year and well over $1 billion more than it forecast early in the quarter. Revenue from data centers experienced a remarkable increase of 233% compared to the previous quarter, accompanied by an expansion in gross margins, which rose to over 78% from 51%.

The scarcity has positioned memory stocks among the leading performers in the market. Micron stock has appreciated over 85% since the beginning of the year. Western Digital and Seagate Technology have seen their share prices double this year, while Sandisk’s has quadrupled. The surge in data center activity has created an unprecedented demand for memory, fundamentally reshaping the industry landscape. David Goeckler announced on Thursday that the company has entered into multi-year partnerships with five clients seeking to ensure a reliable supply of memory. “We believe this marks a fundamental evolution of our business,” Goeckler stated. On Thursday, Cook stated that Apple would “look at a range of options” in response to the rising memory prices. It may establish multi-year agreements with memory suppliers such as Sandisk, Micron, and Samsung. Goeckler on Thursday indicated that Sandisk was engaged in discussions with certain “edge customers,” encompassing PC and smartphone manufacturers, regarding potential agreements.

Ultimately, it may be the consumers who bear the cost. “We expect Apple to raise the [average sales price] of new higher end iPhones (Foldable, ProMax and Pro) introduced this fall,” wrote Bank of America analysts in a note on Friday. “The iPhone is perceived as a product with relatively inelastic demand, indicating that a $100 price increase would not significantly alter the demand curve, while simultaneously alleviating most of the margin pressure associated with memory costs.” Bank of America. “Apple Inc.: Change is in the air; Many positive catalysts ahead; PO to $330.” Wall Street’s assurance that Apple can offset increased memory expenses contributed to the support of shares on Friday. The equity increased by 3.3%, reaching a year-to-date peak at the close.