Apple's New CEO Shifts Spending Priorities, Raising Questions About Margin Targets

Apple's next fortnight is significant not just for its potential new product launches but also for changes in leadership. On September 1, John Ternus becomes CEO, marking the end of Tim Cook's tenure as one of the longest and most lucrative in corporate history. Ternus, a hardware engineer who has been with Apple since 2001, has already made significant changes to the company's spending habits. In the first nine months of FY2026, research and development (R&D) spending rose by 32.5% to $34 billion while share buybacks fell by 12% to $62.1 billion.

This shift in spending priorities is a departure from Cook's strategy, which focused on buying back shares to boost earnings per share growth. Ternus's approach, however, is aimed at investing in R&D and innovation, as seen in the company's recent launches of new silicon and an all-new Siri. The direction is clear: Apple is spending on research and development, but it cannot fund a hyperscaler-scale AI build and maintain a $90 billion annual buyback simultaneously.

The question on everyone's mind is where the money comes from. Apple generates $136.7 billion of free cash flow annually and holds $39.5 billion in cash and equivalents. However, funding both R&D and buybacks at the same time may not be sustainable. The market's reaction to Apple's Q3 guidance drop highlights this tension. Despite beating expectations on revenue and gross margin, the stock fell 7.35% on July 31 due to supply constraints.

On September 9, Apple is expected to launch its first foldable iPhone alongside other new products. The economics of the foldable are a concern, with prices ranging from $2,000 to $2,500, according to Ming-Chi Kuo's estimates. This price point may be necessary to cover materials costs and hit Apple's margins, but it raises questions about the company's ability to maintain its margin targets in an industry where DRAM contract prices are up over 75%.

The tension between R&D spending and buybacks is a pressing concern for investors. As Apple shifts its focus towards innovation, it must balance this with the need to maintain its financial discipline. The outcome of this balancing act will have significant implications for Apple's stock price and future growth prospects.