Apple Shed $426 Billion in Market Cap in 2 Days. Here's What Wall Street Is Getting Wrong.

Apple (NASDAQ: AAPL) just reported its best third quarter in five years.

Net sales grew 16.4% year over year, largely thanks to a 21.7% increase in iPhone sales and an 18.1% overall increase in product sales. It marked the first Q3 since fiscal 2021 when products outpaced services growth.

But despite the strong results, Apple fell 7.4% on July 31 -- losing $426 billion in market cap in just two days. Here's what Wall Street didn't like about Apple's results, and if the tech stock is a good buy now.

Image source: The Motley Fool.

Products take the spotlight

Demand for Apple's products surged during the pandemic as consumers shifted spending toward discretionary goods rather than services or experiences. But as you can see in the table, Apple's Q3 product sales went practically nowhere for years -- that is, until the jump we just saw in Q3 fiscal 2026.

Data source: Apple.

By comparison, services have been consistently growing in the double digits. Services include cloud storage via iCloud, Apple Card, Apple Pay, and digital subscriptions such as Apple Music, Apple TV, Apple One, and more.

Services have been an excellent, high-margin category for Apple and a way to increase the stickiness of its integrated ecosystem. But at the end of the day, Apple still relies on product sales. And seeing product sales jump is a clear signal that Apple is entering a new upgrade cycle.

Apple's "100-year flood"

In June, Apple raised prices on Mac, iPad, Apple TV, HomePod, and Vision Pro due to surging memory chip costs. Tim Cook addressed the reason for these price increases on the July 30 earnings call:

On the pricing front, we reluctantly raised prices, I would say. We did it because we're in what I would characterize as a 100-year flood on the memory pricing, with exponential increases in memory prices.

Some investors may be fearing that price increases are pulling forward demand for existing Apple product inventory ahead of the annual September new iPhone 18 Pro release. And the other risk is that consumers, who are already dealing with inflationary pressures from higher living costs -- such as food, gas, and shelter -- may resist higher product prices.

Wells Fargo analyst Aaron Rakers asked Apple management on the July 30 earnings call whether it was seeing a pull-forward in demand from the consumer, enterprise, or education markets, and if that's factoring into Apple's outlook. To which Tim Cook responded:

You're talking about on iPhone, I assume, in general. We've been running at this 22% growth rate for the last while. For this cycle has been a 22% increase year to date. It's not obvious, I would say. It's not obvious in the data that what you're asking is true. Obviously, we've now had to increase prices on iPad and Mac, the price elasticity there, it's just too early to come to a definitive conclusion of what happens there.

The 22% Cook is referring to is Apple's iPhone revenue for the nine months ended June 27, 2026 -- which is up 22.4% -- roughly matching the three months ended June 27, 2026 year-over-year growth rate of 21.7%. So while Cook isn't dismissing the notion that demand is being pulled forward, it's also clear that the latest quarter more so matches trends Apple was already seeing this fiscal year in the quarters before it announced price increases in June.

That being said, Apple's weak guidance of just 9% to 11% year-over-year net sales growth for fourth quarter fiscal 2026 seems to indicate that some demand could have been pulled forward. Or, at the very least, Apple is cautious about consumer demand heading into the iPhone 18 Pro launch in September, followed by its hottest quarter of the year, which tends to be the first quarter of Apple's fiscal year (the quarter ending in late December).

Alleviating cost pressures

Apple's rising costs is argubaly an even bigger concern than its weak revenue guidance. On the July 30 earnings call, Apple noted that the primary bottleneck is getting the microchips needed to handle the processing, graphics, and artificial intelligence (AI) functions on its devices. But because demand was better than expected, Apple's supply chain is arguably even more constrained now than it was before, which could lead to margin pressure.

Cook said the following on the July 30 earnings call:

The supply chain just has less flexibility in it than normal. We've been pulling supply ahead. At some point, there's a limit to that.

Arguably, the biggest near-term risk for Apple is that it would have to absorb much of these higher costs because it has already raised prices and consumers are spread thin. But one way to counteract some of that pressure is to make new product purchases more affordable.

Apple's new leasing program, facilitated by Klarna, will cost as little as $17.99 per month. Buy now, pay later options, paired with multi-year service contracts that carriers already offer, can help reduce price increases and drum up demand for upcoming products, such as a foldable iPhone, smart glasses, and an AI-powered pendant.

Granted, these programs are a form of leverage on consumer balance sheets. And too much reliance on buy now, pay later is a red flag for the broader economy. But it's a smart move by Apple to navigate a difficult period in its supply chain while protecting its margins.

Apple's investment thesis remains intact

Even after its sell-off, Apple is far from a cheap stock at 35.3 times earnings. However, the growth stock remains a good buy for investors who believe Apple can overcome its supply chain challenges and capitalize on AI without drastically increasing capital expenditures (capex).

AI tools will operate on Apple's devices. So Apple doesn't need to spend boatloads of capex developing its own AI models. Rather, it can cater to user preferences by offering a suite of options and collecting fees in the process. So AI will fuel a product upgrade cycle and new product development. And when paired with double-digit services growth and stock buybacks, Apple's earnings will accelerate, justifying its premium valuation.

There are plenty of other AI stocks with greater growth potential than Apple. But Apple benefits from AI while still generating gobs of free cash flow, making it arguably one of the most well-rounded AI stocks to buy now.

Wells Fargo is an advertising partner of Motley Fool Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Klarna Group. The Motley Fool has a disclosure policy.