Apple Faces a No-Win Pricing Dilemma. Should Investors Be Worried?

Apple's (NASDAQ: AAPL) latest iteration of Siri, Siri AI, is a big step forward for the company. The updated chatbot can converse more effectively with users, remember conversations, understand what's on the screen, and generate images.

But all those features require a hefty amount of processing on the device, which uses more memory than most non-artificial intelligence features. And with memory prices already soaring up to 90% in the first quarter alone, Apple is facing a bit of a dilemma. It may soon need more memory for its devices, while paying more for memory than in the past -- all while trying to maintain the high profit margins it's used to.

Here's what's happening and why investors don't need to be worried just yet.

Image source: Getty Images.

Apple's new Siri AI requires a serious amount of memory

Apple says the most advanced Siri AI features -- like expressive voices and advanced dictation -- will only work on models with 12 gigabytes (GB) of DRAM memory. The problem is that even the base version of the iPhone 17 comes with just 8 GB.

On-device AI processing requires significant memory, and many models with less than 12 GB of DRAM won't be able to handle it. Apple likes to keep Siri's processing on its devices, rather than in the cloud, to make its iPhones and other products more secure. It's part of what sets Apple apart from its competitors, but in this case, it means only the newest, most high-end devices get the best Siri AI features.

One way Apple maintains its impressive gross margins of around 39% for its products is by selling high-end products packed with good hardware -- but not so good that it cuts into its profits. That balance just got a lot harder with the new Siri AI, and Apple might need to increase its baseline memory soon to keep up with its own software features.

Memory chips are in low supply, and costs are rising fast

The bigger problem with Siri AI using up more device memory is that it comes at the same time that memory processors are in short supply, which is pushing costs higher.

Memory prices have jumped 80% to 90% in the first few months of this year, thanks to the increase in demand for memory brought on by large data center build-outs. The surge in memory prices has been a boon for companies like Micron Technology, but it means prices are likely to keep rising.

In the second quarter, Apple CFO Kevan Parekh noted that the Q2 product gross margin decreased slightly because of "seasonal loss of leverage and higher memory costs."

CEO Tim Cook also noted that the company expects "significantly higher memory costs" in the current quarter, saying:

And while we do not give color beyond June, I can tell you that beyond the June quarter, we believe memory costs will drive an increasing impact on our business, and we will continue to evaluate this.

Apple already has some memory inventory that will help offset rising costs, and it also receives better prices than some companies do simply because it's a very large hardware customer. But it's clearly warning that memory prices are a persistent issue it's dealing with.

Should Apple investors be worried?

Higher memory prices are clearly already impacting Apple and could do so further. Add to that the fact that some of Apple's iPhones could need more memory in the future for Siri AI, and it looks increasingly like Apple's margins could get squeezed.

But it's not time to worry just yet.

Apple has faced rising semiconductor prices before, and it's had to balance more device features and improved hardware upgrades.

Investors should keep a close eye on how Apple's management handles the next few quarters, though. New iPhones typically debut in September, and price changes to its flagship devices are closely watched.

I believe Apple may end up absorbing some of the higher costs and raise prices on some of its top-tier models. That would help the company maintain its coveted margins without passing too much of the cost on to consumers.

Chris Neiger has positions in Apple. The Motley Fool has positions in and recommends Apple and Micron Technology. The Motley Fool has a disclosure policy.