Is Apple Stock a Buy on the Dip as iPhone Sales Surge?

Apple (NASDAQ: AAPL) continued its streak of strong iPhone sales during its fiscal third quarter, but the stock fell as service revenue and China sales came up short of expectations. Nonetheless, the stock is still up around 48% over the past year.

Apple once again saw robust iPhone sales, as consumers rushed to buy the smartphone ahead of expected price increases due to rising component costs. iPhone revenue jumped 22% year over year to $54.3 billion in the quarter ended June 27, which was ahead of the $53.86 billion consensus, as compiled by LSEG. It saw strength across both developed and emerging markets, and its installed base hit an all-time high.

Image source: The Motley Fool.

Apple's other product sales were mixed

Mac revenue was also robust, with sales surging 29% year over year to $10.4 billion and cruising past analyst expectations for sales of $8.74 billion. The company credited the strong sales to the success of the new MacBook Neo and MacBook Pro. It set records in the quarter for both new customers and upgraders.

Sales of Apple's other products were mixed. Sales of iPads fell 6% to 6.2 billion, as it faced tough comps following the introduction of last year's A16-powered iPad. Wearable revenue, meanwhile, rose by 6% to $7.9 billion, with the company seeing a record number of Apple Watch upgraders.

Total product segment sales climbed by 18% to $78.7 billion. China was once again solid, with revenue increasing 22% to $18.82 billion. However, that did fall well short of analyst expectations for revenue of $19.58 billion.

Apple Services revenue growth slowed

Apple's services segment -- which consists of its App Store, iCloud storage, Google Search revenue sharing, Apple Pay, Apple TV, and more -- saw revenue grow 12% to $30.74 billion. That was a big deceleration from the 16% growth it saw last quarter and fell well shy of the $31.22 billion in revenue expected by analysts. The company said it saw significant currency headwinds in the quarter, which impacted its service growth by 2.5 percentage points.

Product gross margin rose by 140 basis points sequentially to 40.1%, with tariff refunds having a positive impact of 2.5 percentage points. Like other companies in the tech space, Apple is trying to manage soaring memory prices. Service margin, meanwhile, fell by 110 basis points sequentially to 75.6% due to a shift in revenue mix. Overall gross margin was 50.1%, helped by 2 percentage points from tariff rebates. Even excluding that, it would have been above analyst expectations of 47.9%.

Apple guidance points to headwinds

Overall, Apple's revenue rose by 16% to $109.42 billion, while its earnings per share (EPS) climbed 29% to $2.02. Excluding an $0.11 tariff rebate boost, adjusted EPS would have been $1.89. That topped the analyst consensus estimates for EPS of $1.89 on sales of $108.65 billion.

For the fiscal fourth quarter of 2026, Apple projected its revenue to grow by 9% to 11% year over year. iPhone sales are expected to grow in the mid-teens, impacted by currency headwinds and supply constraints. Service revenue is expected to rise at a similar level to fiscal Q3, after removing the currency impacts it saw last quarter. It guided for gross margin to be between 47% and 48%.

Is it time to buy the dip?

Apple has a fabulous compounding business model, where its product sales, led by iPhones, bring people into its ecosystem and feed directly into its high-margin services business. Given the strong product growth the company has been seeing and the record iPhone install base, this should translate into stronger service revenue down the road, so I wouldn't be worried about one quarter of growth impacted by currency headwinds.

That said, it is also facing some memory headwinds, and its stock valuation has become quite frothy. Even after the dip, the stock trades at a forward price-to-earnings (P/E) ratio of around 34.5 times based on analysts' estimates for fiscal 2027 (which ends in September 2027).

The stock has been on a tremendous run over the past decade, but a lot has come from multiple expansion. As such, I wouldn't be buying the stock just yet on this pullback.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.