When the market asks about returns on computing power, will cash flow continue to support the premium? Booming iPhone demand helps Apple Inc. (AAPL.US) beat earnings expectations, and Goldman Sachs Group, Inc. issues a bullish research report.

U.S. consumer electronics giant Apple Inc. (AAPL.US) released its fiscal fourth-quarter 2026 earnings report for the period ended September 26 on Tuesday morning Beijing time, and held its earnings call shortly afterwardthe first such call since John Ternus became Apple Inc.'s CEO. Wall Street financial giant Goldman Sachs Group, Inc. issued a bullish research report on Apple Inc. shortly after the results, with its analyst team concluding in the earnings commentary that the performance of iPhone, Mac and resilient gross margins should support a share price rise, maintaining its "Buy" optimistic rating and 12-month price target of $390. Based on that day's closing price of $338.32, the Goldman Sachs Group, Inc. target implies 15.3% potential upside over the next ten months, corresponding to a potential market capitalization of approximately $5.67 trillion. The key to Apple Inc.'s earnings data is that after price increases on high-end products, overall Apple Inc. ecosystem product sales data and demand for Apple Inc.'s high-end product line proved more resilient than Goldman Sachs Group, Inc. had envisioned; however, in the upcoming Christmas and New Year holiday season, further increases in memory chip prices and the cloud operating costs of Siri AI will erode the actual profit from every dollar of sales. In fiscal fourth-quarter 2026, Apple Inc.'s revenue grew 12% year-over-year to $114.477 billion, and diluted earnings per share (EPS) rose 14% to $2.10, both exceeding the optimistic expectations of Goldman Sachs Group, Inc.'s analyst team. Apple Inc.'s share price was roughly flat when the earnings data first came out, then fell about 4% at one point after the call disclosed a potentially relatively weak holiday-season gross margin range outlook, with the decline hovering around 3% during the night session. Apple Inc.'s share price has been notably resilient amid the recent global tech stock selloff, mainly because, in contrast to Alphabet Inc. Class C parent Alphabet, Amazon.com, Inc., Facebook parent Meta and other large tech giants frantically issuing debt to purchase AI computing infrastructure, and because these giants' long-term steady free cash flow has shifted significantly into negative territory amid the AI infrastructure boom, Apple Inc.'s continued strong free cash flow data has earned it a market premium. Why has Apple Inc.'s share price been able to outperform the Nasdaq 100 and the Philadelphia Semiconductor Index against the tide amid the global tech stock selloff? From the U.S. stock market close on October 23 to October 30, Apple Inc.'s share price fell 0.89%, while the Nasdaq 100 Index, known as the "bellwether of the global AI trade and tech stocks," fell 1.98%, with Apple Inc. outperforming by about 1.09 percentage points. Particularly striking evidence of "Apple Inc.'s share price rising against the tide and outperforming the AI trade theme and broad tech stocks" came in the two trading days of October 29-30: Apple Inc. rose a cumulative 0.23%, while the Nasdaq 100 Index and the Philadelphia Semiconductor Index fell sharply by 4.79% and 8.52%, respectively. Apple Inc.'s share price had rebounded about 24% from its June low to before the earnings report, adding about $1 trillion in market capitalization, with its forward 12-month P/E ratio rising to about 36x, a high since 2008. Supporting this relative strength is verifiable cash return: in fiscal 2026, Apple Inc.'s operating cash flow was $145.097 billion, and after deducting $9.041 billion in cash capital expenditure on fixed assets, free cash flow was about $136.056 billion, up 37.8% year-over-year. As the market grows increasingly worried about Meta and Alphabet Inc. Class C parent Alphabet and other cloud computing giants delaying cash recovery under ever-larger AI investment scales, Apple Inc. can use its strong existing cash flow to support valuation and accelerate its layout in frontier AI technology without large-scale "cash burning"; but once investors have already paid a high premium for this certainty, holiday-season gross margin below expectations would be enough to trigger a pullback. The strong contrast between Apple Inc.'s share price resilience and the "bellwether of the AI computing beta strategy"the Philadelphia Semiconductor Indexfurther indicates that Apple Inc.'s long-standing, exceptionally strong cash flow data happens to hit the direction the market is most willing to pay a premium for right now: as the AI infrastructure buildout sector comes under renewed scrutiny over capital expenditure, rising AI financing costs and ultimate returns, Apple Inc. is showing investors a path to commercializing frontier AI technology based on strong cash flow, relying on its existing devices, user data and the industry's most powerful ecosystem distribution capability, and in addition, demand for the already-launched, explosively demanded high-end foldable iPhone starting at $1,999 is expected to bring long-term and positive fundamental growth catalysts. Bob O'Donnell, chief analyst at TECHnalysis Research, told the media after the earnings report that early response to the Duo, priced starting at $1,999, shows hot-seller potential, and the more immediate test is whether Apple Inc. can resolve screen issues on some devices and ramp up production in time. Citi analyst Asiya Merchant takes a longer view of the growth opportunity: beyond the replacement demand driven by new products associated with the more expensive foldable screen, services expansion and future charging methods for Siri could also become catalysts, so this analyst maintained a "Buy" rating and $365 price target after Apple Inc.'s earnings report. Who drove the earnings surprise? Mac contributed the biggest expectation gap, iPhone validated high-end pricing resilience According to the Goldman Sachs Group, Inc. research report, Apple Inc.'s fiscal fourth-quarter iPhone revenue was $57.583 billion, up 17% year-over-year, above the FactSet consensus estimate of $56.616 billion; Mac product line revenue was $10.792 billion, up 24% year-over-year, above the market expectation of $9.810 billion. Measured by Goldman Sachs Group, Inc.'s own quantitative model, Mac and iPhone contributed $2.109 billion and $1.022 billion more revenue, respectively, but iPad and Wearables, Home and Accessories combined were $2.304 billion less, though ultimately Apple Inc.'s revenue was still $879 million above Goldman Sachs Group, Inc.'s optimistic forecast. This explains why Goldman Sachs Group, Inc. remains bullish on Apple Inc.'s pricing power but has not yet characterized this quarter's report as a full recovery in consumer electronics. In the view of Goldman Sachs Group, Inc.'s analyst team, the quality of Apple Inc.'s earnings at this stage mainly depends on total services revenue. Services revenue was $31.573 billion, setting a record high for a single quarter, up 10% year-over-year, basically in line with market expectations; but services gross margin reached 76.0%, above the market expectation of 75.2% and above the 75.4% shown by Goldman Sachs Group, Inc.'s quantitative forecast model. By Goldman Sachs Group, Inc.'s analyst team's calculations, the services business accounted for about 27.6% of group revenue but contributed 43.7% of gross profit. Apple Inc.'s products gross margin was about 37.2%, above the market expectation of 36.7% and basically in line with Goldman Sachs Group, Inc.'s optimistic quantitative model forecast. In Goldman Sachs Group, Inc.'s view, the biggest surprise in the services business is thatservices account for only about 28% of revenue but contribute about 44% of group gross profit. Under the heavy pressure of surging DRAM/NAND memory chip prices, Apple Inc.'s fiscal fourth-quarter gross margin still looked optimisticas high as 47.9%, which, although at a one-year low, was above Goldman Sachs Group, Inc. and Wall Street expectations despite the heavy memory cost pressure, with about 1 percentage point coming from the favorable impact of Trump administration tariff refunds; EPS also included about $0.05 of tariff refund contribution. Excluding this factor, Apple Inc.'s profitability was still better than expected, but the magnitude of the beat would be more modest. In Goldman Sachs Group, Inc.'s view, every $100 of Apple Inc.'s services revenue brings $76 of gross profit, above the market expectation of $75.2 and Goldman Sachs Group, Inc.'s forecast of $75.4. Weighted by the revenue share of the two most critical businesses (products and services), group gross margin reached 47.9%, unexpectedly above Goldman Sachs Group, Inc.'s optimistic quantitative model forecast of 47.5%; operating profit was $35.631 billion, with an operating margin of 31.1%, both exceeding market expectations of $34.602 billion and 30.5%. Tariff refunds added about 1 percentage point to group gross margin and about $0.05 to EPS. Since Goldman Sachs Group, Inc. had already factored in the refunds beforehand, what is more noteworthy is that Apple Inc.'s reported diluted EPS for the quarter was $2.10, $0.09 above Goldman Sachs Group, Inc.'s forecast of $2.01 that already accounted for tariff refunds. Excluding the $0.05 benefit from refunds, Apple Inc.'s diluted EPS for the quarter would be about $2.05, still above Goldman Sachs Group, Inc. and Wall Street analysts' consensus baseline forecast; other net income metrics above forecasts and a lower effective tax rate than forecast also helped EPS. By region, the biggest underestimate by Goldman Sachs Group, Inc. was Greater China: revenue in the region grew 21% year-over-year to $17.539 billion, $872 million above Goldman Sachs Group, Inc.'s forecast. By comparison, Apple Inc.'s total global revenue was only $879 million above Goldman Sachs Group, Inc.'s forecast. Revenue guidance up, gross margin outlook unexpectedly down: why did the earnings call change the share price direction? The most noteworthy comparison for Goldman Sachs Group, Inc.'s latest research report on Apple Inc.'s earnings is its latest judgment on the global holiday shopping season before the full guidance was revealed: revenue growth in the low-to-mid single digits, gross margin of 46%-47%, and operating expenses of about $20 billion. By contrast, Apple Inc. management actually guided: revenue growth of 7%-10%, stronger than the market's roughly 6% expectation; but gross margin of only 45%-46%, with the entire range below the general market expectation and the midpoint below Goldman Sachs Group, Inc. analysts' expectation of about 46.5%, and significantly below the 47.9% gross margin figure shown in the latest earnings report data; operating expenses were expected at about $20.4 billion-$20.8 billion, also above Goldman Sachs Group, Inc.'s expectation. At the same time, the higher-profit-contribution services business is expected to grow only 8%-9%, below the 10.7% analyst expectation shown by LSEG Data & Analytics. But two specific reasons should not be conflated: third-party licensing and exchange rates mainly slow services revenue growth; the continued upward trend in memory chip prices is the primary reason for group gross margin pressure, with Siri AI expansion an additional cost. What the market slightly cut after the earnings call was its judgment on holiday-season profitability, while Apple Inc. management still expects that quarter's revenue to hit a company record high. Goldman Sachs Group, Inc. analysts said the Apple Inc. earnings call also revealed a key detail of Apple Inc.'s AI business model. On-device inference already has concrete value: Gap runs loss-prevention models locally on Mac mini in hundreds of stores, avoiding cloud inference fees paid per call. At the same time, tasks that Siri AI needs servers to process generate cloud costs, which Apple Inc. records in cost of services sales; starting with the December quarter, deferred revenue allocated to bundled services in device selling prices and recognized over the device's useful life will also reflect the addition of Siri AI, this high-performance AI system. Management plans to set usage limits on some server-side features and offer paid expansion in the future, but did not disclose standalone AI revenue. There is also a time lag on the hardware side: from June to September, Apple Inc.'s manufacturing purchase commitments increased by $33 billion, which helps secure supply but does not mean $33 billion of low-priced memory has been locked in. Old inventory can temporarily buffer price increases; as higher-priced new materials enter production, whether price increases and the mix of high-end models can protect gross margin is the test for next quarter. Why does Goldman Sachs Group, Inc. still give $390? Its core bet is that more than 2.5 billion active devices and more than 1.5 billion paid subscriptions enable Apple Inc. to sell more services and devices to existing users at low customer acquisition cost, and the strong profits from these sales data will cover, at scale, the costs of memory chip price increases and purchased cloud computing capacity; Goldman Sachs Group, Inc.'s analyst team added in the report that the huge device base and brand loyalty help lower customer acquisition costs, drive repeat purchases and service consumption, and Goldman Sachs Group, Inc. bets that over the next five years, services will contribute most of the group's incremental gross profit. Goldman Sachs Group, Inc. judges that most of the group's gross profit increment over the next five years will come from services, and values the stock at about 40x forward one-year-rolled expected EPS; its model lists fiscal 2027 and 2028 EPS of $9.16 and $9.76, respectively. This target is quite sensitive to the valuation multiple: holding the roughly $9.75 earnings implied by $390 unchanged, if the market assigns only 35x forward P/E, the valuation would be about $341, almost back to the closing price on the earnings day. Longer replacement cycles, supply disruptions in key components, services competition and platform regulation, and insufficient capital returns from buybacks or M&A are all risks listed by Goldman Sachs Group, Inc.; the most direct is whether services profit growth can support a 40x valuation. In addition, in the view of Goldman Sachs Group, Inc.'s analysts, as global investors continue to scrutinize returns on trillion-dollar-scale AI infrastructure investment, Apple Inc. is advancing AI commercialization by relying on its existing devices, operating system entry points and ecosystem distribution capability while still generating ample cash flow, making it easier for it to earn a more significant valuation premium over the long term compared with other tech giantsthe most typical manifestation being that "from October 29 to 30, Apple Inc. rose a cumulative 0.23%, while the Philadelphia Semiconductor Index fell sharply by 8.52% over the same period." The major divergence among Wall Street investment institutions on Apple Inc.'s share price outlook after the earnings release is basically concentrated on whether price increases, product mix and services monetization can offset a cost combination that may continue to add new items in the near term. Citigroup maintained its "Buy" optimistic rating, with a price target still at $365, implying about 7.9% upside, corresponding to about $5.30 trillion; the institution's senior analyst Asiya Merchant emphasized that EPS still beat expectations after excluding tariff refunds, as well as the opportunities from new products, services expansion and future Siri charging. UBS Group AG, meanwhile, maintained its "Neutral" cautious rating, with a price target of $296, implying 12.5% downside, corresponding to about $4.30 trillion; UBS Group AG analyst David Vogt acknowledged the quarterly performance of iPhone and Mac but believes component price increases, growth pressure on search and the App Store, and the temporary nature of tariff refunds limit valuation room.